Record keeping

Certain start-up expenses immediately deductible

From the 2015–16 income year, certain start-up expenditure that would be deductible over five years under section 40-880 of the ITAA 1997 is fully deductible in the income year in which the expenditure is incurred.

Expenditure may be fully deductible in the income year incurred if:

• it relates to a small business that is proposed to be carried on

and

• it is incurred  
  • in obtaining advice or services relating to the proposed structure or the proposed operation of the business, or
  • in payment to an Australian government agency of a fee, tax or charge relating to setting up the business or establishing its operating structure
   

and

• in that income year in which the deduction is claimed, the entity that incurred the expenditure  
  • is a small business entity, or
  • does not carry on a business and does not control or is controlled by an entity carrying on a business in that income year that is not a small business entity in that income year.
   

Professional advice and services relating to the structure or the operations of the proposed business

Professional advice and services that may be deductible under this section include advice from a lawyer or accountant on how the business may be best structured as well as services such individuals or firms may provide in setting up legal arrangements or business systems for such structures. It does not include the cost of acquiring assets that may be used by the business. Similarly, advice and services in relation to the operation of the proposed business includes professional advice on the viability of the proposed business (including due diligence where an existing business is being purchased) and the development of a business plan.

Payments to Australian government agencies

Payments of taxes, fees or charges relating to establishing the business or its structure to an Australian government agency may be immediately deducted under this section.

An Australian government agency is a Commonwealth, State or Territory government (or an authority of these). Local governments are included as an authority of the relevant State or Territory government.

Broadly, this category of expenditure includes regulatory costs incurred in setting up the new business. Examples include the costs associated with creating the entity that may operate the business (such as the fee for creating a company) and costs associated with transferring assets to the entity which is intended to carry on the proposed business (for example, the payment of stamp duty). It does not include expenditure relating to taxes of general application such as income tax. The payment of these general taxes does not relate to establishing a business or its structure but instead to the operation and activities of the businesses. Such general taxes are also not normally deductible under section 40-880.

Eligible taxpayers

Immediate deductibility is also limited to expenditure by certain entities, with the effect of excluding expenditure incurred by larger businesses.

If the claimant entity carries on a business in the income year, it must itself be a small business entity which is broadly defined under tax law as an entity with an aggregate annual turnover of less than $10 million.

Alternatively, if this entity does not carry on a business in the income year it must not be connected with or be an affiliate an entity that carries on a business in the income year that is not a small business entity.

 

Assets for which deductions are claimed under the UCA

For some depreciating assets, deductions must be claimed under the UCA rather than under the simplified depreciation rules:

• assets allocated to a low-value or a common-rate pool before you started to use the simplified depreciation rules (those assets must remain in the pool and deductions must be claimed under the UCA)
• horticultural plants
• in-house software where the development expenditure is allocated to a software development pool; see Software development pools, and
• assets that are leased out, or are expected to be leased out, for more than 50% of the time on a depreciating asset lease. (This does not apply to depreciating assets subject to hire purchase agreements, or short-term hire agreements on an intermittent hourly, daily, weekly or monthly basis where there is no substantial continuity of hiring.)

Depreciating assets used in rental properties are generally excluded from the simplified depreciation rules on the basis that they are subject to a depreciating asset lease.

You cannot deduct an amount for a decline in value of second-hand depreciating asset in a residential rental property under the simplified depreciation rules if the amount is not deductible under the UCA.

Capital expenditure deductible under the UCA

As the simplified depreciation rules apply only to depreciating assets, certain capital expenditure incurred by a small business entity that does not form part of the cost of a depreciating asset may be deducted under the UCA rules for deducting capital expenditure.

This includes capital expenditure on certain business related costs and amounts directly connected with a project; see Capital expenditure deductible under the UCA.

In-house software

Under the UCA, you can choose to allocate to a software development pool expenditure you incur in developing (or having another entity develop) in-house software you intend to use solely for a taxable purpose. Once you allocate expenditure on such software to a pool, you must allocate all such expenditure incurred thereafter (in that year or in a later year) to a pool; see Software development pools.

If you have allocated such expenditure to a software development pool either before or since using the simplified depreciation rules, you must continue to allocate such expenditure to a software development pool and calculate your deductions under the UCA.

If you:

• have not previously allocated such expenditure to a software development pool and you choose not to do so this year, or
• incur the expenditure in developing in-house software that you do not intend using solely for a taxable purpose

then you can capitalise it into the cost of the unit of software developed and claim deductions for the unit of in-house software under the simplified depreciation rules when you start to use it (or install it ready for use) for a taxable purpose.

Its decline in value can then be worked out using an effective life of:

• four years (if you started to hold the in-house software under a contract entered into after 7.30 PM AEST on 13 May 2008 or otherwise started to hold it after that day) or
• five years (if the in-house software is first used or first installed ready for use on or after 1 July 2015)

and using the prime cost method.

Deductions for in-house software acquired off the shelf by a small business entity for use in their business are available under the simplified depreciation rules. For example, such an item costing less than $1,000 will qualify for an outright deduction.

Primary producers

A small business entity can choose to claim deductions under either the simplified depreciation rules or the UCA for certain depreciating assets used in the course of carrying on a business of primary production.

The choice is available for:

• water facilities
• fencing assets
• fodder storage assets
• depreciating assets relating to  
  • landcare operations
  • electricity connections and phone lines.
   

You can choose to claim your deductions under the simplified depreciation rules or the UCA for each depreciating asset. Once you have made the choice, it cannot be changed.

You must keep the following information for a depreciating asset:

• the first and second elements of cost
• the opening adjustable value for the income year
• any adjustments made to cost or adjustable value
• the date you started holding the asset and its start time
• the rate or effective life used to work out the decline in value
• the method used to work out the decline in value
• the amount of your deduction for the decline in value and any reduction for use of the asset for a non-taxable purpose
• the adjustable value at the end of the income year
• any recoupment of cost you have included in assessable income, and
• if a balancing adjustment event occurs for the asset during the year, the date of the balancing adjustment event, termination value, adjustable value at that time, the balancing adjustment amount, any reduction of the balancing adjustment amount and details of any rollover or balancing adjustment relief.

You must also keep:

• details of how you worked out the effective life of a depreciating asset where you have not adopted the effective life determined by the Commissioner
• if you have recalculated the effective life of an asset, the date of the recalculation, the recalculated effective life, the reason for the recalculation and details of how you worked out the recalculated effective life, and
• original documents such as suppliers’ invoices and receipts for expenditure on the depreciating asset.

Additional record-keeping requirements apply if you acquire an asset from an associate or if you acquire a depreciating asset but the user is the same or is an associate of the former user; see Depreciating asset acquired from an associate and Sale and leaseback arrangements.

Failure to keep proper records will attract penalties.

Record keeping for low-value pools

For depreciating assets in a low-value pool, you need to keep the following details (some details relate to the assets and some to the pool):

• the start time of assets in the pool and the date you started holding them
• the closing pool balance at the end of the previous income year
• any second elements of cost incurred for the income year for assets in the pool at the end of the previous income year
• the opening adjustable value of any low-value assets you have allocated to the pool for the income year
• the first element of cost of any low-cost assets allocated to the pool for the income year
• the second element of cost of low-cost assets and low-value assets allocated to the pool for the income year
• the taxable use percentage of each amount added to the pool for the income year
• the termination value and taxable use percentage for any assets in the pool in respect of which a balancing adjustment event occurred during the income year and the date of the balancing adjustment event
• the closing pool balance
• the decline in value
• any amount included in assessable income because the taxable use percentage of the termination value exceeds the closing pool balance, and
• any recoupment of cost you have included in assessable income.

Because a capital gain or capital loss may arise when a balancing adjustment event occurs:

• for a depreciating asset which you expect to use for a non-taxable purpose, or
• for a depreciating asset which you have allocated to a low-value pool and expect to use for a non-taxable purpose

then you must keep the following information:

• the first and second elements of cost
• the termination value
• the taxable use percentage.

Generally, records relating to a depreciating asset allocated to a low-value pool must be retained for a period of five years starting from the end of the income year in which the asset is allocated to the pool. However, there are two exceptions:

• If an amount is included in the second element of an asset’s cost after the asset is allocated to a low-value pool, the records of the cost must be retained for a period of five years from the time the expenditure is incurred.
• Records of acquisitions relating to delayed claims for GST input tax credits must be retained for at least five years after lodgment. Therefore, if a claim for input tax credits relates to a depreciating asset in a low-value pool, the record of acquisition may need to be retained for a period of five years which begins later than the end of the income year in which the asset is allocated to the pool.

Record keeping for rollover relief

If automatic rollover relief applies (see Rollover relief) the transferor must give the transferee a notice containing enough information for the transferee to work out how the UCA rules apply to the transferee’s holding of the depreciating asset. Generally, this needs to be done within six months after the end of the transferee’s income year in which the balancing adjustment event occurred. The transferee must keep a copy of the notice for five years after the asset is:

• disposed of, or
• lost or destroyed

whichever happens earlier.

If a transferor and transferee jointly choose rollover relief, the decision must be in writing and must contain enough information for the transferee to work out how the UCA rules apply to the transferee’s holding of the depreciating asset. Generally, the choice needs to be made within six months after the end of the transferee’s income year in which the balancing adjustment event occurred. The transferor must keep a copy of the agreement for five years after the balancing adjustment event occurred. The transferee must keep a copy for five years after the next balancing adjustment event that occurs for the asset.