ATO Interpretative Decision

ATO ID 2004/793 (Withdrawn)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• This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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

Is the capital expenditure incurred by a taxpayer 'costs' to stop carrying on their business for the purposes of paragraph 40-880(1)(g) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The capital expenditure incurred by the taxpayer is 'costs' to stop carrying on the business for the purposes of paragraph 40-880(1)(g) of the ITAA 1997 because they were directed and integral to the taxpayer stopping carrying on their business.

Facts

The taxpayer carried on a business for a taxable purpose. The taxpayer decided to sell the business to another entity under an arm's length arrangement. The taxpayer undertook the process of selling the business. In doing so, the taxpayer incurred capital expenditure that was necessary in commencing and carrying out the sale process. That capital expenditure consisted of the following costs:

•

legal fees for advice in relation to, and the drafting of, the terms and conditions of the contract of sale;

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accounting fees for providing financial information about the business to the purchaser; and

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inventory valuation fees as required by the purchaser.

Reasons for Decision

Paragraph 40-880(1)(g) of the ITAA 1997 applies to certain capital expenditure incurred by a taxpayer providing that expenditure is 'costs' to stop carrying on their business.

Such expenditure is 'costs' to stop carrying on the business if it is directed and integral to the taxpayer stopping carrying on their business. The meaning of the words 'stop carrying on your business' in paragraph 40-880(1)(g) of the ITAA 1997 includes the case where a business has ceased to be carried on by a taxpayer because the taxpayer has sold that business. It necessarily follows that any costs that are directed and integral to the selling of the business will therefore be directed and integral to the taxpayer stopping carrying on their business.

The legal, accounting and inventory valuation costs were directed to selling the taxpayer's business and directly facilitated the sale process. These costs had a direct causal relationship to the sale process and were necessary to sell the taxpayer's business. As these costs were integral to selling the business, they are 'costs' incurred by the taxpayer to stop carrying on their business within paragraph 40-880(1)(g) of the ITAA 1997.

Provided that the other requirements for deductibility under section 40-880 of the ITAA 1997 are met, the taxpayer can deduct 20% of the costs in the year they incur them and in each of the following four years.

Year of income:  Year ended 30 June 2004

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

Related ATO Interpretative Decisions
ATO ID 2004/794

Keywords
Blackhole expenditure
Business related costs
Capital expenditure
Legal expenses
Uniform capital allowances system

Business Line:  Effective Life and Capital Allowances Centre of Expertise

Date of publication:  1 October 2004

ISSN: 1445-2782