ATO Interpretative Decision

ATO ID 2003/151 (Withdrawn)

Capital allowancesl

Capital Allowances: business related costs - to establish a business structure
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This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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.

Status of this decision: Decision Withdrawn 9 June 2006

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 incorporate a company for the purpose of acquiring an existing business deductible under paragraph 40-880(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) if the business is not actually acquired?

Decision

Yes. Capital expenditure incurred to establish the corporate structure through which a business is proposed to be carried on is deductible under paragraph 40-880(1)(a) of the ITAA 1997 provided the expenditure is incurred for the requisite purpose and the other requirements of section 40-880 of the ITAA 1997 are satisfied.

Facts

The taxpayer incorporated a company for the purpose of acquiring and operating an existing business. The taxpayer incurred various capital costs to incorporate the company including fees payable under the Corporations Act 2001 to register the company with the Australian Securities and Investments Commission. The company entered into a contract, which was subject to obtaining finance, to acquire the existing business. The company's application for finance was not successful with the result that the company was unable to proceed with the purchase.

Reasons for Decision

Capital expenditure to establish a business is generally different to and separate from capital expenditure to establish the structure through which the business is to be carried on.

Broadly speaking, paragraph 40-880(1)(a) of the ITAA 1997 provides a deduction for capital expenditure to establish a '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.

A deduction for capital expenditure to establish the business structure under subsection 40-880(1) of the ITAA 1997 is only available to the extent the business is, was or will be carried on for a taxable purpose. It is necessary, therefore, that the expenditure is incurred for the appropriate purpose. In this context, a deduction continues to be available even though the business is not actually acquired, provided the expenditure is incurred for the purpose of establishing a structure through which a business is proposed to be carried on for a taxable purpose. However, the taxpayer would need to be able to clearly and objectively support their contention that a business was proposed to be carried on for a taxable purpose.

The taxpayer in this case can support the purpose of the expenditure by a variety of activities including entering into a purchase contract and applying (albeit unsuccessfully) for finance.

Date of decision: 24 December 2002

Year of income: Year ending 30 June 2002

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

Corporations Act 2001
1

Related ATO Interpretative Decisions
ATO ID 2003/152
ATO ID 2003/153

Keywords
Blackhole expenditure
Business related costs
Legal expenses
Taxable purpose
Incorporation expenses

Business Line: Capital Allowances Centre of Expertise

Date of publication: 21 March 2003

ISSN: 1445-2782

history

	Date:	Version:
	24 December 2002	Original statement
You are here →	9 June 2006	Archived

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