ATO Interpretative Decision

ATO ID 2004/980

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is capital expenditure incurred on a due diligence process to help the taxpayer decide whether to attempt the acquisition of the whole of a business deductible under paragraph 40-880(1)(e) of the Income Tax Assessment Act 1997 (ITAA 1997) if the proposed acquisition did not proceed?

Decision

No. The capital expenditure incurred on a due diligence process to help the taxpayer decide whether to attempt the acquisition of the whole of a business is not deductible under paragraph 40-880(1)(e) of the ITAA 1997 because the expenditure lacked the necessary connection with the takeover process.

Facts

The taxpayer was contemplating the acquisition of the whole of the business from an entity rather than attempting to acquire the entity itself. The business included all the tangible assets, trade marks and goodwill of that business and it was one of several businesses carried on by the vendor. However, the taxpayer was unsuccessful in acquiring the business.

Prior to the unsuccessful attempted acquisition, the taxpayer incurred capital expenditure on a due diligence process for the purpose of deciding whether to decide to proceed with the proposed acquisition.

Reasons for Decision

Subject to subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(e) of the ITAA 1997 provides a deduction for capital expenditure incurred by a business in unsuccessfully attempting a takeover, to the extent that the business is, was or will be carried on for a taxable purpose.

Firstly, in order for paragraph 40-880(1)(e) of the ITAA 1997 to apply, there must be the attempt of a takeover. While the paragraph generally only applies where there is a takeover under the Corporations Act 2001, it does not exclude other types of takeovers.

Secondly, in order for paragraph 40-880(1)(e) of the ITAA 1997 to apply, the capital expenditure must be incurred as integral part of the process of attempting the takeover. Expenditure on deciding whether to attempt the takeover lacks the necessary connection with the takeover process because it is incurred before the process begins. The process of attempting the takeover of a business would generally begin with the formal offer for the business being forwarded to the vendor by the acquirer. The due diligence is an analytical review of the records and operations of a target business by the prospective purchaser. Broadly, its basic purpose is to determine whether the target business is worth acquiring and at what price. As such, the due diligence process would occur before the process of attempting the acquisition begins.

As the due diligence process would occur before the process of attempting the acquisition begins, capital expenditure incurred as part of a due diligence process for the attempted acquisition would not be incurred in the process of attempting the takeover.

Consequently, capital expenditure incurred as part of a due diligence process prior to the attempt of the unsuccessful acquisition of the whole of a business is not deductible under paragraph 40-880(1)(e) of the ITAA 1997.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   paragraph 40-880(1)(e)
   subsection 40-880(3)

Related ATO Interpretative Decisions
ATO ID 2004/979

Keywords
Blackhole expenditure
Capital expenditure
Takeovers & mergers
Uniform capital allowances system

Business Line:  Effective Life and Capital Allowances Centre of Expertise

Date of publication:  24 December 2004

ISSN: 1445-2782