ATO Interpretative Decision

ATO ID 2004/257 (Withdrawn)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• This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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 subsection 40-880(2).
  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

Can the taxpayer claim a deduction under paragraph 40-880(1)(f) of the Income Tax Assessment Act 1997 (ITAA 1997) for the capital payment they made to the Administrator under the Deed of Company Arrangement (DCA)?

Decision

No. The taxpayer is not entitled to a deduction under paragraph 40-880(1)(f) of the ITAA 1997 because the company was never subjected to a liquidation process.

Facts

The taxpayer was a shareholder, director and employee of a private company. The company traded until Receivers of the assets were appointed to the company by its secured creditor. On the same day the company was placed in voluntary administration pursuant to a resolution of the company's Directors.

The company was previously not under administration nor had a liquidator been appointed to wind up the company.

The assets of the company were sold by the Receivers and the proceeds of the sales went to the secured creditor.

After the company was placed in voluntary administration, the company and its creditors executed a DCA and the Administrator of the company was appointed as the Deed Administrator. The DCA, among other things, provided for the same moratorium as section 444E of the Corporations Act 2001.

Under the terms of the DCA the taxpayer was required to pay, in their capacity as a Director of the company, a certain amount to the Administrator. Application of all of the funds collected by the Administrator was governed by the DCA. The amount paid by the taxpayer, in addition to other funds collected by the Administrator, was used to pay the Administrator's fee and the creditors.

Before the execution of the DCA the Administrator did nothing more than meet with the company's creditors because the company was then controlled by the Receivers. After the DCA was executed the Administrator recovered money from the company's debtors and paid dividends to creditors as required by the DCA.

After the DCA was executed the Deed Administrator resigned following the finalisation of all matters with respect to the DCA. At that time responsibility and control of the company was reinstated to the directors of the company. The company remained in existence after the finalisation of the DCA.

Reasons for Decision

Subject to other requirements of section 40-880 of the ITAA 1997, paragraph 40-880(1)(f) provides a deduction to the shareholders of a company for costs they incur of liquidating the company to the extent that the company's business is, was or will be carried on for a taxable purpose.

The procedures of voluntary administration and liquidation are regulated by different provisions of the 'Corporations Law'. Voluntary administration is different from liquidation although a voluntary administration can be converted into a liquidation.

Voluntary administration brings, inter alia, a statutory moratorium in legal proceedings, winding-up proceedings and execution against company property. A company under administration cannot be wound up voluntarily, nor will the court as a general rule appoint a provisional liquidator. If any winding-up application is on foot, the court will adjourn the hearing of the application if satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up (section 440A of the Corporations Act).

A DCA regulates the relationship between the company and its creditors. It binds the deed administrator, the company and its officers and members as well as all creditors for claims arising on or before the date mentioned in the DCA. The consequence is that, until the DCA comes to an end, no party bound by the deed is permitted to apply for the winding-up of the company or proceed with an application filed before the deed becomes binding (subsection 444E(2) of the Corporations Act).

The company in this case was not, at any time before the DCA was finalised, subjected to a liquidation process. In fact, the existence of the company was specifically maintained. Therefore, the amount the taxpayer paid to the Administrator is not a cost of liquidating the company and is not deductible to the taxpayer under paragraph 40-880(1)(f) of the ITAA 1997.

Year of income:  Year ended 30 June 2002

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

Related ATO Interpretative Decisions
ATO ID 2004/258

Keywords
Blackhole expenditure
Capital Allowances CoE
Liquidation
Taxable purpose
Uniform capital allowance system
Voluntary administration

Business Line:  Effective Life and Capital Allowances Centre of Expertise

Date of publication:  26 March 2004

ISSN: 1445-2782