ATO Interpretative Decision
ATO ID 2004/794 (Withdrawn)
Income tax
Capital Allowances: business related costs - to stop carrying on your business - no stopping of businessFOI status: may be released
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This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 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) even though the business ultimately did not stop being carried on by the taxpayer?
Decision
Yes. The capital expenditure incurred by the taxpayer is costs 'to stop carrying on' their business for the purposes of paragraph 40-880(1)(g) of the ITAA 1997. Even though the business ultimately did not stop being carried on, the costs 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 legal, accounting and inventory valuation costs that were necessary in commencing and carrying out the sale process.
Ultimately, the prospective purchaser was unable to raise sufficient funds to finance the purchase with the result that the contract of sale was not executed. The taxpayer could not find an alternative purchaser and continued carrying on the same business after the attempted sale was abandoned.
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 a cost 'to stop carrying on' their business.
Expenditure is incurred 'to stop carrying on' a taxpayer's business if it can be objectively determined through activities carried out by the taxpayer that the expenditure is incurred directly for the purpose of 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 that has ceased to be carried on by a taxpayer because the taxpayer has sold that business. It necessarily follows that any costs that are objectively determined to be incurred directly for the purpose of selling a business will therefore be objectively determined to be incurred directly for the purpose of 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. The incurring of the expenditure, as part of the sale process, can objectively support that the purpose of incurring these costs was to sell the business. The failure of the purchaser to ultimately execute the contract of sale does not alter the fact that the taxpayer's costs were incurred for that purpose and were integral to selling the business. As these costs were incurred directly for the purpose of 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.
Date of decision: 3 September 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
section 40-880
paragraph 40-880(1)(g)
ATO ID 2004/793
Keywords
Blackhole expenditure
Business related costs
Capital expenditure
Legal expenses
Uniform capital allowances system
ISSN: 1445-2782
| Date: | Version: | |
| 3 September 2004 | Original statement | |
| You are here | 9 June 2006 | Archived |