ATO Interpretative Decision

ATO ID 2005/265 (Withdrawn)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• This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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 incurred by the taxpayer '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 incurred by the taxpayer 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 directly for the requisite purpose of defending the taxpayer's business against a takeover attempt.

Facts

The taxpayer, a company that carried on business for a taxable purpose, incurred capital expenditure on analysing and evaluating a proposal by its majority shareholder to acquire all of the remaining issued shares in the taxpayer. The taxpayer's analysis and evaluation was consistent with its obligations under the Corporations Act 2001. The majority shareholder held a voting power in the taxpayer that was in excess of 50%. The proposal involved a scheme of arrangement process under the Corporations Act. The proposal was conditional upon the taxpayer's Board of Directors recommending the scheme of arrangement to its minority shareholders.

The taxpayer's capital expenditure included legal and other advisory fees and costs of obtaining an independent expert's valuation report. The taxpayer also incurred capital expenditure on notifying its shareholders of the proposal and on communicating to them the progress of the proposal.

The taxpayer's Board of Directors did not recommend the proposal to its minority shareholders and the proposal lapsed. Consequently, the majority shareholder did not acquire all of the remaining issued shares in the taxpayer under a court approved scheme of arrangement.

Reasons for Decision

Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(d) of the ITAA 1997 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. For the paragraph to apply there must be, at the least, the attempt of a takeover.

The word 'takeover' is not defined but the example contained in paragraph 40-880(1)(d) of the ITAA 1997 states that expenditure incurred by a taxpayer in complying with subsections 633(1) or 635(1) of the Corporations Act is covered by the paragraph. The provisions of the Corporations Act relate to statutory obligations of a bidder and a target company when a takeover bid has been made by the bidder to the target company.

Paragraph 3.56 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.5) 2002 (TLAB No. 5 (2002)), which includes types of expenditure incurred in defending a takeover under the Corporations Act that could come within paragraph 40-880(1)(d) of the ITAA 1997, refers to capital expenditure incurred on the preparation and issuing of Part B statements or Part D statements. These are statements (currently referred to as Target Statements) which the target company is required to prepare and send to its shareholders under subsection 633(1) of the Corporations Act (where an off-market bid has been made) or subsection 635(1) of the Corporations Act (where a market bid has been made).

The reference to the Corporations Act in both the example contained in paragraph 40-880(1)(d) of the ITAA 1997 and the Explanatory Memorandum to the TLAB No. 5 (2002) supports the view that the term 'takeover' in paragraph 40-880(1)(d) includes (but is not necessarily limited to) a takeover process within the context of the Corporations Act. Accordingly, for the purpose of paragraph 40-880(1)(d), a takeover includes the processes listed under Chapter 6 of the Corporations Act in relation to acquisition of shares in a company regardless of whether the process ultimately results in the acquisition of shares.

As the majority shareholder's voting power in the taxpayer was greater than 20%, it was required to undertake a process listed under section 611 of the Corporations Act in order to acquire additional shares in the taxpayer. Item 17 in the table of exceptions in that section includes an acquisition that results from a compromise or arrangement approved by the Court under Part 5.1 of the Corporations Act. The majority shareholder used this process to attempt to acquire all of the remaining issued shares in the taxpayer under the proposed scheme of arrangement. Accordingly, for the purposes of paragraph 40-880(1)(d) of the ITAA 1997, the majority shareholder had made a takeover attempt in respect to the taxpayer even though the takeover attempt did not result in the majority shareholder acquiring all of the taxpayer's shares under a court approved scheme of arrangement.

The requirement in paragraph 40-880(1)(d) of the ITAA 1997 that the capital expenditure be incurred 'to defend' is satisfied if 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 costs the taxpayer incurred in respect to information it would have been required to provide to its shareholders if the proposal had formally progressed to seeking approval for the scheme of arrangement, were directly related to the discharge of duties by the taxpayer and its Directors imposed by the Corporations Act. The expenditure was directed to duly forming a view as to the true worth of shareholder's shares and the adequacy of the proposed offer to acquire those shares, and to consider the nature of the response to that offer to be recommended to shareholders.

Paragraph 3.56 of the Explanatory Memorandum to TLAB No. 5 (2002) states that the following types of expenditure incurred in defending a takeover under the Corporations Act could come within paragraph 40-880(1)(d) of the ITAA 1997, to the extent they are capital expenditure:

•

legal and accounting costs

•

stockbrokers' fees

•

compliance fees under the Corporations (Fees) Regulations 2001

•

consultancy fees paid for public relations, merchant bankers and the media

•

printing, advertising and mailing of documents produced for shareholders

•

costs of independent evaluations of the takeover offer

•

the salary or wages of individuals employed specifically to undertake takeover defence activities, and

•

the preparation and issuing of Part B statements or Part D statements.

The capital expenditure incurred by the taxpayer in meeting its obligations including capital expenditure on legal and other advisory fees, obtaining an independent valuation report, and on communications to its shareholders falls within the examples listed above. The capital expenditure is, therefore, 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the ITAA 1997.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   paragraph 40-880(1)(d)
   subsection 40-880(3)

Related ATO Interpretative Decisions
ATO ID 2004/72

Other References:
Explanatory Memorandum to Taxation Laws Amendment Bill (No. 5) 2002

Keywords
Blackhole expenditure
Capital expenditure
Capital Allowances CoE
Takeovers & mergers
Uniform capital allowances system

Business Line:  Effective Life and Capital Allowances Centre of Expertise

Date of publication:  23 September 2005

ISSN: 1445-2782