ATO Interpretative Decision

ATO ID 2005/342 (Withdrawn)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• This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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 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.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   40-880
   40-880(1)(e)
   40-880(3)

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

Business Line:  Administration, Business and Personal Taxes Centre of Expertise

Date of publication:  2 December 2005

ISSN: 1445-2782