ATO Interpretative Decision

ATO ID 2004/72

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the capital expenditure incurred by the taxpayer to defend against claims to a major business asset and to part ownership of their business deductible under paragraph 40-880(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The capital expenditure incurred by the taxpayer is not deductible under paragraph 40-880(1)(d) of the ITAA 1997 because the legal action taken against the taxpayer was not mainly directed towards their business and would not result in a takeover as required by that paragraph.

Facts

B, a relative of the taxpayer, was involved in the taxpayer's business. B was to inherit 50% of a major asset of the business upon the death of the taxpayer. A change in the taxpayer's will substantially reduced the entitlement of B to that asset. In legal action against the taxpayer, B claimed that a partnership existed between them and there was an agreement for the transfer of 50% of the asset upon the death of the taxpayer. Alternatively it was claimed that the asset was a partnership asset in which both had an equal share. The effect of the claims would be to secure a 50% interest in the asset for B.

Reasons for Decision

Broadly, paragraph 40-880(1)(d) of the ITAA 1997 provides a deduction for capital expenditure incurred to defend a taxpayer's business against a takeover, to the extent that the business is, was or will be carried on for a taxable purpose. It generally applies only where there is a takeover under the Corporations Act 2001.

While paragraph 40-880(1)(d) of the ITAA 1997 does not exclude other types of takeovers, it is considered that the legal action taken in this case would not have resulted in the takeover of the business of the taxpayer as required under that paragraph.

For amounts to be deductible under paragraph 40-880(1)(d) of the ITAA 1997, firstly there must be a takeover. The Australian Oxford Dictionary, Oxford University Press, South Melbourne, Victoria, defines takeover as the assumption of control (especially of a business); the buying out of one company by another. Gaining effective control is the essential objective of a business takeover. For a partner in a partnership to have effective control over the partnership, the partner must have a controlling interest in the partnership, and capacity to direct the conduct of the day to day business of the partnership.

The legal action taken by B would not have given B effective control over the taxpayer's business. At the most, it would have only resulted in an equal partnership between the taxpayer and B.

Further, the centre of the dispute was the interest in the major asset in question, which was associated with the conduct of the taxpayer's business. The legal action taken by B was mainly directed towards the asset rather than the taxpayer's business. The objective of the legal action was to secure a 50% interest in the major asset upon the death of the taxpayer.

Therefore, the capital expenditure incurred by the taxpayer is not deductible under paragraph 40-880(1)(d) of the ITAA 1997 because the legal action taken against the taxpayer was not mainly directed towards their business and would not result in a takeover of the business as required under that paragraph.

Year of income:  Year ended 30 June 2002

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

Other References:
The Australian Oxford Dictionary, Oxford University Press, South Melbourne Victoria

Keywords
Blackhole expenditure
Capital expenditure
Legal expenses
Uniform capital allowances system

Business Line:  Effective Life and Capital Allowances Centre of Expertise

Date of publication:  23 January 2004

ISSN: 1445-2782