ATO Interpretative Decision

ATO ID 2003/143 (Withdrawn)

Capital allowances

Capital Allowances: business related costs - deductibility of due diligence expenses
FOI status: may be released

This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 capital expenditure incurred to obtain an accountant's opinion as part of a due diligence process prior to the purchase of an existing business deductible under paragraph 40-880(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. Capital expenditure incurred as part of a due diligence process prior to the purchase of an existing business is not deductible under paragraph 40-880(1)(a) of the ITAA 1997.

Facts

The taxpayer paid fees to an accountant, as part of the due diligence process, to obtain an opinion in respect of the potential purchase of an existing business. The taxpayer subsequently purchased the business.

Reasons for Decision

Paragraph 40-880(1)(a) of the ITAA 1997 provides a deduction for capital expenditure incurred by a taxpayer in establishing their 'business structure'. The term 'business structure' covers the legal entity (such as a company) or the legal relationship (such as a partnership or trust) that is established as the entity that will carry on the business for a taxable purpose and that will hold the business assets. Expenditure to incorporate a company, form a partnership or create a trust would generally satisfy this provision.

The performance of due diligence is a fundamental process relevant to business acquisitions. It generally occurs once the vendor and purchaser have established common cause, but before the sale and purchase agreement is executed. Due diligence is an analytical review of the records and operations of a target business by the prospective purchaser. Broadly its basic purpose is to determine whether the target business is worth acquiring and at what price.

Expenditure incurred in undertaking due diligence relating to the purchase of an existing business is for the purpose of deciding whether to acquire a business and at what price. It is not directed to, or for the purpose of, establishing the business structure.

Capital expenditure incurred as part of the due diligence process, to obtain an accountant's opinion in respect of the potential purchase of an existing business, is therefore not deductible under paragraph 40-880(1)(a) of the ITAA 1997.

Date of decision: 30 January 2003

Year of income: Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
Paragraph 40-880(1)(a)

Keywords
Accounting expenses
Blackhole expenditure
Business related expenses
Uniform capital allowances system

Business Line: Capital Allowances Centre of Expertise

Date of publication: 15 March 2003

ISSN: 1445-2782

history

	Date:	Version:
	30 January 2003	Original statement
You are here	9 June 2006	Archived

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