ATO Interpretative Decision

ATO ID 2005/310 (Withdrawn)

Income tax

Capital Allowances: business related costs - to raise equity for your business - extent business is, was, or will be carried on for a taxable purpose
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This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 the deduction under subsection 40-880(1) of the Income Tax Assessment Act 1997 (ITAA 1997) reduced because a business holds a substantial number of shares and the only dividend income that can be received from those shares is not assessable income?

Decision

Yes. The deduction under subsection 40-880(1) of the ITAA 1997 is reduced to the extent that the shares are held as part of carrying on the business of the taxpayer.

Facts

The taxpayer incurred capital expenditure to raise equity for their business through the issue of shares.

The taxpayer is an Australian resident company that carries on business in Australia.

The taxpayer also carries on business in another country through a wholly owned offshore subsidiary company. The activities of the subsidiary, including the potential for growth, are an important part of the business of the taxpayer group. Investors in shares in the taxpayer also invest in the business conducted through the subsidiary.

The taxpayer receives some interest and fee income from its subsidiary. Any dividend income received from the subsidiary will not be assessable income.

Reasons for Decision

Subject to other requirements of section 40-880 of the ITAA 1997, paragraph 40-880(1)(c) of the ITAA 1997 provides a deduction for capital expenditure incurred to raise equity for your business to the extent that the business is, was or will be carried on for a taxable purpose.

So far as is relevant here, taxable purpose means the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997). Something is done for the purpose of producing assessable income if it is done for the purpose of gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income (subsection 995-1(1) of the ITAA 1997). A deduction under subsection 40-880(1) is therefore available to the extent that the business is, was or will be carried on for the purpose of gaining or producing assessable income.

The purpose for which the business is carried on may be determined by considering the activities that are currently carried on and reasonably expected to be carried on by the business. It is all the activities that are a part of carrying on the business both now and into the future that must be considered, and whether those activities are for the purpose of gaining or producing assessable income. It is the scope of the business activities and the extent to which they have, or are likely to produce assessable income, that is important and not simply the actual receipt of assessable or other income.

In this case the activities of the offshore subsidiary company are a significant element of the taxpayer's overall business. Potential for growth in the activities of the subsidiary has also been identified as important to the overall business of the taxpayer into the future. The Prospectus for the share issue made it clear that investors in the taxpayer also invest in the business of the subsidiary.

The business of the taxpayer includes holding the shares in its offshore subsidiary as a strategic part of its overall activities. The dividend income from these shares will not be assessable income. The business of the taxpayer is not and will not be carried on for a taxable purpose to the extent that holding these shares forms part of the business of the taxpayer and the deduction available under subsection 40-880(1) of the ITAA 1997 is reduced accordingly.

Date of decision: 18 August 2005

Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   subsection 40-25(7)
   section 40-880
   subsection 40-880(1)
   paragraph 40-880(1)(c)
   subsection 995-1(1)

Related ATO Interpretative Decisions
ATO ID 2005/309

Keywords
Blackhole expenditure
Capital Allowances CoE
Capital expenditure
Uniform capital allowances system

Business Line: Effective Life and Capital Allowance Centre of Expertise

Date of publication: 11 November 2005

ISSN: 1445-2782

history

	Date:	Version:
	18 August 2005	Original statement
You are here	9 June 2006	Archived

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).