ATO Interpretative Decision
ATO ID 2009/83
Income Tax
Capital Allowances: business related costs - undivided amount of capital expenditure - several discrete matters - dissection of amountFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Should the undivided amount of capital expenditure the taxpayer incurred on legal fees to resolve and defend several discrete legal matters be dissected as between each legal matter for the purpose of considering deductibility of the expenditure under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The undivided amount of capital expenditure the taxpayer incurred on legal fees should be dissected as between each discrete legal matter for the purpose of considering deductibility of the expenditure under section 40-880 of the ITAA 1997 because only part of the undivided expenditure is attributable to each distinct and severable matter.
Facts
The taxpayer, a company, incurred capital expenditure on legal fees to resolve and defend several matters brought against it and its two director/shareholders.
One of the directors/shareholders of the taxpayer (shareholder X) previously carried on a business in partnership (the partnership business) with two other parties. The other director/shareholder (shareholder Y) was an employee of the partnership business. Shareholder X was alleged to have breached the partnership agreement by leaving the partnership business without giving adequate notice. In addition, prior to the termination of the partnership, shareholder X and shareholder Y were alleged to have established a company which carried on a business in direct competition with the partnership business.
The other two partners of the former partnership took legal action against the taxpayer and its directors/shareholders on several matters.
Generally the legal fees incurred by the taxpayer related to:
- •
- defending the establishment and carrying on of its business in competition with the partnership business (expenditure in relation to the taxpayer's business for the purposes of paragraph 40-880(2)(a) of the ITAA 1997), and
- •
- establishing the termination date of the former partnership so as to determine the extent of any breach of contract and fiduciary duty by shareholder A (expenditure in relation to the business that used to be carried on by the partnership for the purposes of paragraph 40-880(2)(b) of the ITAA 1997).
While all of the legal services and advice were provided by the same supplier, the legal fees were invoiced to the taxpayer as an undivided amount even though they related to resolving and defending the two distinct legal matters above.
Reasons for Decision
All legislative references are to the ITAA 1997 unless otherwise stated.
Subject to the limitations and exceptions contained in subsection 40-880(3) to subsection 40-880(9), subsection 40-880(2) provides that you can deduct, in equal proportions over a period of five income years starting in the year in which you incur it, capital expenditure you incur:
- (a)
- in relation to your business, or
- (b)
- in relation to a business that used to be carried on, or
- (c)
- in relation to a business proposed to be carried on, or
- (d)
- to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.
In the present case, the legal fees were invoiced as an undivided amount but were incurred on resolving and defending various legal matters relating to both the business the taxpayer carries on and the former partnership business. Separate legal advice and services were provided in respect of each distinct and severable legal matter.
An issue arises in these particular circumstances around whether such expenditure should be dissected between each of the businesses to which the expenditure relates for the purpose of considering the deductibility of the expenditure under section 40-880.
As the legal matters are distinct and severable from each other, as was the advice and services provided in respect of them, it is appropriate to dissect the undivided amount, and that amount is capable of dissection, into amounts expended in respect of each legal matter. Therefore, the expenditure should be dissected between each of the businesses to which the expenditure relates.
As the expenditure in this case can be dissected, the limitations and exclusions contained in subsection 40-880(3) to subsection 40-880(9) are to be applied to each amount separately.
Therefore, as the capital expenditure incurred in defending the establishment and carrying on of the taxpayer's business in competition with the partnership business is expenditure in relation to the taxpayer's business for the purposes of paragraph 40-880(2)(a), that expenditure will be subject to the limitation in subsection 40-880(3). As the capital expenditure incurred to establish the termination date of the former partnership is expenditure in relation to a business that used to be carried on by another entity (being the partnership business) for the purposes of paragraph 40-880(2)(b), that expenditure will be subject to the limitation in subsection 40-880(4). Both amounts will be subject to the limitations and exceptions in subsection 40-880(5) to subsection 40-880(9).
Date of decision: 21 July 2009Year of income: Year ended 30 June 2006
Legislative References:
Income Tax Assessment Act 1997
section 40-880
subsection 40-880(2)
paragraph 40-880(2)(a)
paragraph 40-880(2)(b)
paragraph 40-880(2)(c)
paragraph 40-880(2)(d)
subsection 40-880(3)
subsection 40-880(4)
subsection 40-880(5)
subsection 40-880(6)
subsection 40-880(7)
subsection 40-880(8)
subsection 40-880(9)
ATO ID 2009/84
Keywords
Blackhole expenditure
Capital Allowances CoE
Uniform capital allowances system
ISSN: 1445-2782