Starting a business can be costly. Most of the time there are significant set up costs before you have even started generating an income. So how can you claim costs when you don’t have an income to offset it?
As a general rule capital costs such as the purchase of a business is not claimable, however, the costs associated with maintaining and running a business are tax deductible.
Costs associated with setting up the business can be claimed over a 5 year period
Even though you aren’t earning an income immediately it can be assumed that during the financial year you will earn an income. These startup costs can be offset against that income during the financial year. However, providing the business passes the business turnover test of $20,000 then costs associated with setting up the business can also be claimed over a 5 year period when it may be more financially beneficial to do so. This turnover test of $20,000 can be pro rata against the months that you were operating if it was less than 12 months in the first financial year. For example if you started operating in February then you would need to make $8,333 between February and June of your first year of operation.
In the past (before July 1, 2015) start up expenses could only be deductible over a 5 year period for all businesses and applied to start up expenses such as costs associated with raising capital, advice or services relating to the structure, payments to Government agencies in the form of fees, taxes or charges in relation to setting up the business and its operating structure. However, most of these can now be claimed immediately as a deduction. So if you have a high turnover in the first year and wish to claim them immediately you can.
Non deductible costs
What continues to remain non deductible is the cost associated with training or qualifications in order to start your business. So you can’t claim the cost of your medical training to start your medical practice.
You also have to remember that only expenses can be claimed as a tax deduction. If you are purchasing capital such as plant and equipment for your business such as a shop fit out, machinery, tools and motor vehicles then these will need to be depreciated over 5 years rather than claimed as an expense. This is the same for a start up and an established business. But it is important as a start up that you are clear on what purchases are expenses versus a capital purchase.
To ensure that you get the most value from your deductions and have the correct structure for your start up it is important to seek professional advice from a tax accountant. Preferably you will have this discussion prior to starting your business. If you are looking at starting a business then the first person you should speak to is a reputable tax accountant.