ATO Interpretative Decision
ATO ID 2005/343
Income tax
Capital Allowances: business related costs - unsuccessfully attempting a takeoverFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 capital expenditure the taxpayer incurred in determining whether to attempt to takeover an unrelated business entity 'costs to your business of unsuccessfully attempting a takeover' for the purpose of paragraph 40-880(1)(e) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Capital expenditure the taxpayer incurred in determining whether to attempt to takeover an unrelated business entity is not 'costs to your business of unsuccessfully attempting a takeover' for the purpose of paragraph 40-880(1)(e) of the ITAA 1997 because the expenditure was incurred before the taxpayer had commenced the process of attempting the takeover.
Facts
The taxpayer, a company that carried on business for a taxable purpose, incurred capital expenditure in engaging the services of a consultant and a solicitor to examine the prospective acquisition of another unrelated company. The examination was intended to provide sufficient information on which the taxpayer could decide whether to attempt to takeover the other company.
The taxpayer's Board of Directors subsequently formally approved the making of an offer for the purchase of all of the issued shares in the target company. Following that approval, the taxpayer incurred further capital expenditure on consultancy fees in negotiating a purchase price with the target company.
The taxpayer ultimately decided not to proceed with the acquisition of the company.
Reasons for Decision
Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(e) provides a deduction for capital expenditure incurred by a business of unsuccessfully attempting a takeover, to the extent the business is carried on for a taxable purpose. This means that there must be, at the least, an attempt to takeover.
The word 'takeover' is not defined for the purposes of section 40-880 of the ITAA 1997 and, accordingly, takes its ordinary meaning relevant to the context in which it is used. The Australian Oxford Dictionary Australian Oxford Dictionary 1999, Oxford University Press, Melbourne, defines takeover as 'the assumption of control (especially of a business); the buying out of one company by another'. The taxpayer's attempted acquisition of all of the issued shares in the target company would have resulted in it assuming control of the company and is the attempt of a takeover for the purposes of paragraph 40-880(1)(e) of the ITAA 1997.
The requirement in paragraph 40-880(1)(e) of the ITAA 1997 that the capital expenditure be incurred attempting a takeover is satisfied where the expenditure is incurred directly for the purpose of, and as an integral part of the process of, attempting the takeover. The commencement of the attempted takeover in this case was objectively evidenced by the taxpayer's formal decision to authorise the making of an offer to acquire all of the issued shares in the target company. The takeover process commenced at the time that approval was given by the Board of Directors.
The expenditure incurred on the consultancy and legal fees in determining whether to attempt to takeover the target company was incurred before the takeover process was commenced. It was not, therefore, incurred directly for the purpose of, and as an integral part of, attempting the takeover.
Year of income: Year ended 30 June 2002 Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
40-880
40-880(1)(e)
40-880(3)
the Act Related ATO Interpretative Decisions
ATO ID 2004/979
ATO ID 2004/980
ATO ID 2005/343
Other References:
The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne.
Keywords
Blackhole expenditure
Business related costs
Capital expenditure
Takeovers & mergers
Uniform capital allowances system
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 18 August 2005 | Original statement |
| 9 June 2006 | Archived |