ATO Interpretative Decision
ATO ID 2005/309 (Withdrawn)
Income tax
Capital Allowances: business related costs - to raise equity for your business - funds used for a share buy-backFOI 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This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 the expenditure incurred to raise funds through the issue of shares, expenditure to 'raise equity for your business' under paragraph 40-880(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) where the funds raised are used to buy-back shares of existing shareholders?
Decision
Yes. Expenditure incurred in issuing shares is to raise equity for your business for the purpose of paragraph 40-880(1)(c) of the ITAA 1997, even where the funds raised are used to buy-back shares from existing shareholders, as the management of share capital is 'part of the conduct of a business'.
Facts
The taxpayer incurred capital expenditure in issuing new shares in the business.
Necessary steps in the share issue included a share-split for existing shareholders prior to the issue of new shares and listing on the Australian Stock Exchange after the shares had been issued.
Substantial funds were raised from the share issue.
The share issue proceeds were used primarily to fund a buy-back of shares from existing shareholders. The remainder (less expenditure in holding the share issue) was retained as working capital resulting in an overall increase in equity within the business.
The issuing of new shares broadened the businesses shareholder base and provided exposure in new and current markets.
Reasons for Decision
Subject to other requirements of section 40-880 of the ITAA 1997, paragraph 40-880(1)(c) of the ITAA 1997 provides a deduction for capital expenditure incurred to raise equity for your business to the extent that the business is, was or will be carried on for a taxable purpose.
Section 40-880 of the ITAA 1997 and the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 and the Taxation Laws Amendment Act (No 5) 2002 provide some guidance to the meaning of 'to raise equity for your business'.
The Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 states that 'Paragraph 40-880(1)(c) generally only applies where there is a raising of equity capital by a company or a fixed unit trust through either a private or public issue of shares or a rights issue'.
The example for paragraph 40-880(1)(c) of the ITAA 1997 includes capital expenditure incurred in issuing new shares to fund business expansion, within this paragraph.
Increasing funds through issuing new shares is raising equity for the purpose of paragraph 40-880(1)(c) ITAA 1997.
Paragraph 40-880(1)(c) of the ITAA 1997 requires that the equity raised be 'for your business'. The paragraph does not require the tracing of funds to determine if they will be used to produce assessable income. However, it is necessary to consider the use of the funds to establish that the equity raised is 'for your business'.
In this case, the majority of the equity raised through the issuing of shares was used to fund the buy-back of shares from existing shareholders and the remainder (less share issue expenses) retained as working capital.
A necessary part of managing the business of a company includes the management of its share capital and share register. This is an important element in managing the cost of capital to the company and the ability to use its shares to fund acquisitions or business expansion. The share buy-back allowed some of the existing shareholders to sell their shares while maintaining stability in their register and a stable share price. It is considered that the use of the funds raised from the share issue to buy-back shares from existing shareholders was undertaken as a requirement of the business.
Accordingly, the expenditure incurred in issuing new shares is expenditure incurred to raise equity for your business.
Date of decision: 18 August 2005Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007
Legislative References:
Income Tax Assessment Act 1997
section 40-880
subsection 40-880(1)
paragraph 40-880(1)(c)
subsection 40-880(3)
ATO ID 2005/310
Keywords
Blackhole expenditure
Capital Allowances CoE
Capital expenditure
Uniform capital allowances system
ISSN: 1445-2782
| Date: | Version: | |
| 18 August 2005 | Original statement | |
| You are here | 9 June 2006 | Archived |