ATO Interpretative Decision
ATO ID 2005/342
Income tax
Capital Allowances: business related costs - defending your business against 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 analysing a proposal made by a prospective purchaser to acquire all of its issued shares '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 the taxpayer incurred in analysing a proposal made by a prospective purchaser to acquire all of its issued shares is 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the ITAA 1997 because the expenditure was incurred directly for the purpose of, and as an integral part of the process of, defending the taxpayer's business against a takeover offer.
Facts
The taxpayer, a company that carried on business for a taxable purpose, was approached by an unrelated entity with a proposal for the entity to buy all the taxpayer's issued shares.
The taxpayer engaged in contractual negotiations about the proposal with the prospective purchaser. The taxpayer incurred capital expenditure on consultancy and legal fees in analysing the proposal made by the prospective purchaser.
The taxpayer rejected the proposal due to a failure to reach agreement on the acquisition price of the issued shares.
Reasons for Decision
Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(d) 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. This means that there must be, at the least, the attempt of a takeover against which to defend.
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 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 proposed purchase of all of the taxpayer's issued shares would have resulted in the purchaser assuming control of the company. For the purposes of paragraph 40-880(1)(d) of the ITAA 1997, the proposal to purchase all of the taxpayer's issued shares is an attempt to takeover, even though the proposal did not ultimately proceed.
The requirement in paragraph 40-880(1)(d) of the ITAA 1997 that the capital expenditure be incurred 'to defend' is satisfied where 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 defines 'defend' as 'to resist an attack made on; protect (a person or thing) from harm or danger'. Further, paragraph 3.54 of the Explanatory Memorandum to Taxation Laws Amendment Bill (No. 5) 2002 (TLAB No. 5 (2002)) makes it clear that the use of the words 'defend' and 'against' in paragraph 40-880(1)(d) means that there must be resistance to the attempted takeover for the paragraph to apply.
Subsection 181(1) of the Corporations Act 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 having the takeover offer analysed, the Board of Directors was exercising their corporate responsibilities by seeking to ensure that the terms of the offer were in the best interests of the corporation. The expenditure was, therefore, incurred to defend or protect the taxpayer (and its shareholders) against an offer that was not in the best interests of the taxpayer (and its shareholders).
Paragraph 3.56 of the Explanatory Memorandum to TLAB No. 5 2002 includes consultancy and legal fees as examples of types of expenditure that could fall within paragraph 40-880(1)(d) of the ITAA 1997. The taxpayer's expenditure is of that specific type.
Accordingly, the expenditure the taxpayer incurred for consultants and legal fees 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.
Date of decision: 18 August 2005Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
40-880
40-880(1)(e)
40-880(3)
subsection 181(1) Related ATO Interpretative Decisions
ATO ID 2004/72
ATO ID 2005/343
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
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 18 August 2005 | Original statement |
| 9 June 2006 | Archived |