ATO Interpretative Decision

ATO ID 2006/204 (Withdrawn)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• This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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 section 40-880. 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 to seek out and encourage a suitable entity to takeover 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

No. The capital expenditure incurred by the taxpayer was to seek out and encourage a suitable entity to takeover the taxpayer and not to defend its business against a takeover as required by paragraph 40-880(1)(d) of the ITAA 1997.

Facts

The taxpayer, a company that carried on business for a taxable purpose, was approached by an unrelated entity to acquire 100% of the taxpayer's issued shares. The taxpayer's Board of Directors did not accept the entity's proposal because they considered the proposal was not in the best interests of the taxpayer's members.

The proposal led the taxpayer to believe that they might be vulnerable to other offers of this nature. The taxpayer subsequently incurred capital expenditure on consultancy and advertising fees to locate and select an entity and to arrange for that entity to acquire 100% of the taxpayer's issued shares at a price considered by the Board of Directors to be in the best interests of the taxpayer's members.

The taxpayer successfully identified an entity which subsequently acquired 100% of its issued shares.

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 for the purposes of section 40-880 of the ITAA 1997 and, accordingly, takes its ordinary meaning relevant to the context in which it is used. The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne, defines takeover as the 'assumption of control (especially of a business); the buying out of one company by another'.

The proposed purchase of all of the taxpayer's issued shares would have resulted in the purchaser assuming control of the company. For the purposes of paragraph 40-880(1)(d) of the ITAA 1997, the proposal to purchase all of the taxpayer's issued shares was an attempt to takeover the taxpayer's business, even though the proposal did not ultimately proceed.

The requirement in paragraph 40-880(1)(d) of the ITAA 1997 that the capital expenditure be incurred 'to defend' is satisfied where 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 word 'defend' is not defined for the purpose of paragraph 40-880(1)(d) and, accordingly, takes its ordinary meaning relevant to the context in which it is used. The Australian Oxford Dictionary defines 'defend' as 'to resist an attack made on; protect (a person or thing) from harm or danger'.

Subsection 181(1) of the Corporations Act 2001 states that a director of a corporation must exercise their powers and discharge their duties in good faith in the best interests of the corporation. The taxpayer's Board of Directors did not accept the entity's proposal because they considered the proposal was not in the best interests of the taxpayer's members. The proposal led the taxpayer to believe that they might be vulnerable to other offers of this nature. Following the proposal, the taxpayer incurred capital expenditure on consultancy and advertising fees to locate, select and arrange for an entity to acquire 100% of the taxpayer's issued shares at a price considered by the Board of Directors to be in the best interests of the taxpayer's members.

Although the taxpayer's actions may have been prompted by the initial proposal to acquire its shares, the expenditure incurred on the consultancy and advertising fees was not directly for the purpose of, and as an integral part of, the process of defending their business against the entity's takeover proposal. Rather, the expenditure was incurred as a result of a separate commercial decision by the taxpayer to ensure that the taxpayer's members were able to dispose of their shares in the taxpayer at a price that the taxpayer's Board of Directors considered to be in the members' best interests. To implement this decision, the taxpayer took active steps to promote the sale of the issued shares in the taxpayer through a process developed to achieve a takeover that was acceptable to the taxpayer's Board of Directors.

The dominant purpose of the taxpayer's actions was to secure the ultimate sale of the issued shares in the taxpayer at an acceptable price. The taxpayer's actions lacked the necessary connection with the entity's takeover proposal for the expenditure incurred to be 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the ITAA 1997.

Accordingly, the capital expenditure incurred by the taxpayer on consultancy and advertising fees to successfully engage a suitable entity to takeover the taxpayer was not 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the ITAA 1997, because it was not incurred directly for the purpose of, and as an integral part of the process of, defending their business against a takeover.

Year of income:  Year ending 30 June 2005

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

Related ATO Interpretative Decisions
ATO ID 2004/72
ATO ID 2005/265
ATO ID 2005/342
ATO ID 2006/205

Other References:
Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne

Keywords
Blackhole expenditure
Business related costs
Capital expenditure
Takeovers & mergers
Uniform capital allowances system

Business Line:  Administration, Business and Personal Taxes Centre of Expertise

Date of publication:  11 August 2006

ISSN: 1445-2782