ATO Interpretative Decision
ATO ID 2004/980 (Withdrawn)
Income Tax
Capital Allowances: business related costs - unsuccessfully attempting a takeover - deductibility of due diligence expensesFOI status: may be released
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This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed. New section 40-880 provides deductions for a greater range of business related costs where the expenditure is incurred after 30 June 2005. Expenditure incurred after that date is deducted under new subsection 40-880(2).
Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of expenditure incurred before 1 July 2005.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
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.
Date of decision: 16 December 2004Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
paragraph 40-880(1)(e)
subsection 40-880(3)
the Act Related ATO Interpretative Decisions
ATO ID 2004/979
Keywords
Blackhole expenditure
Capital expenditure
Takeovers & mergers
Uniform capital allowances system
ISSN: 1445-2782
| Date: | Version: | |
| 16 December 2004 | Original statement | |
| You are here | 9 June 2006 | Archived |