ATO Interpretative Decision

ATO ID 2005/108

Income tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Where the trustee of a deceased estate incurred an amount that served to both wind up the estate and to stop carrying on the business of the estate, was the amount a cost 'to stop carrying on your business', for the purpose of paragraph 40-880(1)(g) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The payment has, objectively, the purpose of stopping the carrying on of your business, and, therefore, is a cost 'to stop carrying on your business' for the purpose of paragraph 40-880(1)(g) of the ITAA 1997, even though the payment also serves another purpose.

Facts

The taxpayer, the trustee of a deceased estate, carried on a business formerly carried on by the deceased. In the course of their finalisation of the estate, the taxpayer incurred capital expenditure in relation to the winding up of the estate, including as part of this the stopping of the business carried on. One activity to stop the business was terminating the contracts of employees.

Reasons for Decision

Paragraph 40-880(1)(g) of the ITAA 1997 sets out certain costs which can qualify for deduction under subsection 40-880(1) of the ITAA 1997. Paragraph 40-880(1)(g) of the ITAA 1997 applies to 'costs to stop carrying on your business'.

Whether or not a cost is to stop carrying on your business can be identified by reference to the purpose for which the cost was incurred. This is an objective purpose test, as described by Dixon J in Robert G. Nall Ltd. v. Federal Commissioner of Taxation (1936) 57 CLR 695; (1936) 4 ATD 335:

... in matters of income tax, purpose is an elusive and indefinite criterion. The purpose of a payment when a deduction is claimed for it becomes an attribute of the transaction rather than a state of mind in some actual person ... when it is said that gaining or producing assessable income must be the purpose of the expenditure if its deduction is to be allowed, no more can be meant than that the circumstances of the transaction must give it the complexion of money laid out in furtherance of a purpose of gaining income.

In paragraph 40-880(1)(g), there is no reference to a qualification of main, principle or dominant purpose. For example, a capital expenditure provision such as paragraph 40-635(1)(b) of the ITAA 1997 refers to expenditure primarily and principally for the purpose of excluding animals from an area excluded by land degradation.

Where the one amount is incurred for a particular purpose but also represents a step in, or is integral to, or facilitates a broader purpose, the particular purpose may be recognised as the relevant purpose in applying paragraph 40-880 (1)(g) of the ITAA 1997. In the present case, for example, the expenditure the taxpayer incurred to terminate the services of the employees of the business was a particular step in the process of ceasing to carry on the business but it also represented an integral step in the process of finalising the deceased estate.

Court cases involving other provisions that do not have a 'primary and principal' requirement, suggest that an objective purpose test for particular legislation, where not specifically directed otherwise as being main or principal, does not necessitate a choice between purposes when both purposes are clearly an integral component of either the immediate or larger outcome.

In Federal Commissioner v. Studdert (1991) 33 FCR 75; 91 ATC 5006; (1991) 22 ATR 762, Justice Hill summarised the judgement of Brennan J. in Magna Alloys & Research Pty Ltd v FCT (1980) 11 ATR 276; 80 ATC 4542 as follows:

...his Honour was of the view that the expenditure bore the character of expenditure necessarily incurred in the carrying on of the appellant's business, and that this character was not lost because the expenditure was apt to serve both the business purpose and the purpose of defending the directors, nor because the principal or dominant reasons for incurring the expenditure was to defend the directors.

With the current facts, a practical test for the identification of 'costs to stop carrying on your business' involves asking whether the costs are part of that narrower process, albeit if also expended to further the broader aim of winding up the estate. If such costs were incurred by the principal to stop carrying on the business the costs could, objectively, be said to be incurred 'to stop carrying on your business', irrespective of any other broader outcome of the expenditure.

The costs of terminating the contracts of employees were costs to stop carrying on the business, irrespective of the fact that the activities were carried out as part of winding up the deceased estate.

Year of income:  Year ended 30 June 2004 Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   section 40-880
   subsection 40-880(1)
   paragraph 40-880(1)(g)
   subsection 40-880(2)

Case References:
Robert G. Nall Ltd. v. Federal Commissioner of Taxation
   (1936) 57 CLR 695
   (1936) 4 ATD 335

Related ATO Interpretative Decisions
ATO ID 2005/106
ATO ID 2005/107

Keywords
Blackhole expenditure
Capital Allowances CoE
Deceased estates
Deductions & expenses
Entities & taxpayer groups
Uniform capital allowances system

Business Line:  Effective Life and Capital Allowance Centre of Expertise

Date of publication:  22 April 2005

ISSN: 1445-2782