The Commissioner has issued a Taxation Ruling affirming his views on the interpretation of the operation and scope of the blackhole provisions. Broadly, the blackhole provisions apply where:
capital expenditure is incurred 'in relation to' a current, former or proposed business; and
the business is carried on for a taxable purpose.
The deduction for the expenditure is spread evenly over a five-year period, but importantly there are still limitations and exceptions such that not all expenditure is covered. The common types of blackhole expenditure for businesses covered by the provisions include feasibility studies for new business ventures, attempting and defending takeovers, and the costs of liquidating a company.
The blackhole provisions are provisions of a last resort. The provisions can only be accessed when an immediate deduction cannot be claimed and when the expenditure is not included in the cost base of a CGT asset.
For capital expenditure to be 'in relation to' a business there must be a sufficient and relevant connection between the expenditure and the business. Business-related capital expenditure does not include expenditure relating to non-business activities such as passive investment, nor do the provisions apply to employment income.
The limitations of the provisions can apply in a number of circumstances, including where a business generates exempt income or non-assessable non-exempt income or if part of the business is not carried on for the purpose of gaining or producing assessable income. A simple example of when expenditure could be limited is when expenditure is incurred to raise capital by a company that has a foreign branch.
If you are considering undertaking, a transaction or incurring capital expenditure of some kind in relation to a proposed, current or past business undertaking you should consider seeking advice on how you may get tax relief as this may assist your investment decision.
If you have any queries please contact your relevant ESV Engagement partner on 9283 1666.
Article by David Prichard