Question: A client of ‘A’ company installs underground fiber-optic cables for internet services in new industrial areas. These cables, which are owned by the client, last about 20 years. Previously, the costs for digging and installation were treated as blackhole expenditures, which is typically a last resort category. However, ‘A’ company thinks these costs should be categorized under Division 40, which deals with depreciable assets. Should these costs be treated as blackhole expenditure or fall under Div. 40? Are these costs considered day-to-day expenses (revenue) or long-term investments (capital)?
Answer: These digging and installation costs are not day-to-day expenses because the benefits from the installed cables last many years; therefore, these are long-term investments, or capital costs. The main issue is whether these costs qualify for tax deductions under Division 40 as capital allowances or if they should be considered blackhole expenditures. It seems clear that these costs should qualify under Division 40 as they are necessary for preparing the cables for use, making them part of the second element of cost in this tax division. The second element includes any spending required to get a depreciable asset ready for use, like the installation costs for these cables.
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