ATO Interpretative Decision

ATO ID 2006/205 (Withdrawn)

Income tax

• This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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 section 40-880. 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.

Issue

Is the capital expenditure incurred by the taxpayer on a break fee 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The capital expenditure incurred by the taxpayer on a break fee is 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the ITAA 1997 because it was incurred directly for the purpose of, and as an integral part of the process of, defending its business against a takeover offer.

Facts

The taxpayer, a company that carried on business for a taxable purpose, was approached by an entity (Bidder A) with an offer for the entity to buy all of the taxpayer's issued shares. The offer was a takeover bid for the purposes of Chapter 6 of the Corporations Act 2001 (CA 2001). The taxpayer's Board of Directors, on behalf of the taxpayer, entered into a contract with Bidder A requiring Bidder A to make a specific takeover offer and the taxpayer to pay compensation (break fee) if any one or more of the taxpayer's Directors withdrew their recommendation of the Bidder's takeover offer. The taxpayer's Board of Directors recommended Bidder A's takeover offer to the taxpayer's shareholders.

The taxpayer was subsequently approached by another entity (Bidder B) with an offer to buy all of the taxpayer's issued shares. The offer was a takeover bid for the purposes of Chapter 6 of the CA 2001. The taxpayer's Board of Directors determined that Bidder B's takeover offer was superior to Bidder A's takeover offer. The Board of Directors subsequently withdrew their recommendation for Bidder A's takeover offer and recommended the takeover offer made by Bidder B to the taxpayer's shareholders.

As a consequence of the taxpayer's Board of Directors withdrawing their recommendation for Bidder A's takeover offer, the taxpayer incurred, under the contract they had entered into with Bidder A, capital expenditure on the break fee.

Reasons for Decision

Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(d) of the ITAA 1997 provides a deduction for capital expenditure you incur to defend your business against a takeover, to the extent your business is carried on for a taxable purpose. For the paragraph to apply there must be, at the least, the attempt of a 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 example contained in paragraph 40-880(1)(d) states that expenditure incurred by a taxpayer in complying with subsections 633(1) or 635(1) of the CA 2001 is covered by the paragraph. These provisions of the CA 2001 relate to statutory obligations of a bidder and a target company when a takeover bid has been made by the bidder to the target company.

Paragraph 3.56 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.5) 2002 (TLAB No.5 (2002)), which describes some types of expenditure incurred in defending a takeover under the CA 2001 that could come within paragraph 40-880(1)(d) of the ITAA 1997, refers to capital expenditure incurred on the preparation and issuing of Part B statements or Part D statements. These are statements (currently referred to as Target Statements) which the target company is required to prepare and send to its shareholders under subsection 633(1) of the CA 2001 (where an off-market bid has been made) or subsection 635(1) of the CA 2001 (where a market bid has been made).

The reference to the CA 2001 in both the example contained in paragraph 40-880(1)(d) of the ITAA 1997 and the Explanatory Memorandum to the TLAB No.5 (2002) supports the view that the term 'takeover' in paragraph 40-880(1)(d) includes (but is not necessarily limited to) a takeover process within the context of the CA 2001. Accordingly, for the purpose of paragraph 40-880(1)(d), a takeover includes the processes listed under Chapter 6 of the CA 2001 in relation to entities covered by that Chapter. Bidder A's takeover offer was an attempted takeover of the taxpayer for the purposes of paragraph 40-880(1)(d).

The requirement in paragraph 40-880(1)(d) of the ITAA 1997 that the capital expenditure be incurred 'to defend' is satisfied if the expenditure is incurred directly for the purpose of and as an integral part of the process of defending your business against a takeover. The word 'defend' is not defined for the purpose of paragraph 40-880(1)(d) and, accordingly, takes its ordinary meaning relevant to the context in which it is used. The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne, defines 'defend' as 'to resist an attack made on; protect (a person or thing) from harm or danger'.

Subsection 181(1) of the CA 2001 states that a director of a corporation must exercise their powers and discharge their duties in good faith in the best interests of the corporation. In entering into the contractual arrangement with Bidder A for the bidder to make a specific takeover offer, and for the taxpayer to pay the break fee upon the withdrawing of their recommendations for Bidder A's takeover offer, the taxpayer's directors were exercising their corporate responsibilities by ensuring that the taxpayer's shareholders received a takeover offer that they considered to be in the best interests of the taxpayer (and its shareholders). Similarly, the taxpayer's directors were exercising their corporate responsibilities in withdrawing their recommendation for Bidder A's takeover offer when they considered Bidder B's takeover offer to be in the best interests of the taxpayer (and its shareholders). The taxpayer's directors were, therefore, obliged to defend or protect the taxpayer (and its shareholders) against Bidder A's takeover offer, resulting in the taxpayer becoming contractually liable to Bidder A for the break fee.

Accordingly, the capital expenditure incurred by the taxpayer on the break fee was 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the ITAA 1997, because it was incurred directly for the purpose of, and as an integral part of the process of, defending its business against a takeover.

Year of income:  Year ended 30 June 2005

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

Related ATO Interpretative Decisions
ATO ID 2004/72
ATO ID 2005/265
ATO ID 2005/342
ATO ID 2006/204

Other References:
Explanatory Memorandum to Taxation Laws Amendment Bill (No.5) 2002
Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne

Keywords
Blackhole expenditure
Business related costs
Capital expenditure
Takeovers & mergers
Uniform capital allowances system

Business Line:  Administration, Business and Personal Taxes Centre of Expertise

Date of publication:  11 August 2006

ISSN: 1445-2782