ATO Interpretative Decision

ATO ID 2006/208 (Withdrawn)

Income tax

Capital Allowances: business related costs - expenditure to convert your business structure - termination of major operational contracts
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This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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 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.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 capital expenditure incurred by the taxpayer to terminate major operational contracts with another party expenditure 'to convert your business structure to a different structure' for the purpose of paragraph 40-880(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The capital expenditure incurred by the taxpayer to terminate major operational contracts was not expenditure 'to convert your business structure to a different structure' for the purpose of paragraph 40-880(1)(b) of the ITAA 1997 because it was not directed and integral to the conversion of the taxpayer's business structure.

Facts

The taxpayer entered into a merger arrangement with an unrelated company. For the purposes of paragraph 40-880(1)(b) of the ITAA 1997, this new legal relationship created the framework within which the taxpayer operates and represents the conversion of the taxpayer's business structure to another business structure. The taxpayer, through the new structure, carries on business for a taxable purpose.

In conjunction with the merger process, the taxpayer incurred capital expenditure in consideration for an external service provider terminating major operational contracts between the taxpayer and the external service provider.

Reasons for Decision

Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(b) provides a deduction for capital expenditure you incur to convert your business structure to a different structure, to the extent your business is, was or will be carried on for a taxable purpose.

Broadly speaking, capital expenditure is incurred for the purpose of converting your business structure to a different structure, if the expenditure can be attributed to tasks and activities which are directed and integral to that purpose.

This is an objective test: each case must be viewed on the basis of its own facts and circumstances to determine whether the expenditure can objectively be demonstrated as having as its purpose the conversion of your business structure to a different business structure. The substance of what was the occasion of, and what was provided from, the capital expenditure, must be taken into account. Examining the purpose for which an amount is expended involves both a consideration of the character of the expenditure and an examination of the business structure and the operation of the business of the taxpayer, in the course of which the capital expenditure has been incurred.

There is a distinction between, on the one hand, a business structure comprised of legal relationships and containing such features as ownership, control, profit distribution and liability and, on the other hand, the profit yielding subject that is operated to earn the profits of the business. This is emphasised by paragraph 3.46 of the Explanatory Memorandum to Taxation Laws Amendment Bill (No.5) 2002 which provides that the type of structural change intended by paragraph 40-880(1)(b) of the ITAA 1997 is about how something was held and not what was held.

The capital expenditure incurred by the taxpayer as consideration to terminate major operational contracts was not incurred 'to convert your business structure to a different structure'. The taxpayer's business structure is the legal relationship through which the business is carried on for a taxable purpose.

The major operational contracts between the taxpayer and the external service provider did not form part of the taxpayer's business structure that was converted to another structure. They represented the way in which the taxpayer obtained necessary services to carry on its business activities.

Accordingly, the capital expenditure was not incurred to convert the taxpayer's business structure to a different structure for the purpose of paragraph 40-880(1)(b) of the ITAA 1997.

Date of decision: 25 January 2006

Year of income: Year ended 30 June 2005

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

Related ATO Interpretative Decisions
ATO ID 2006/207
ATO ID 2006/209

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

Keywords
Blackhole expenditure
Business related costs
Capital expenditure
Uniform capital allowances system

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

Date of publication: 11 August 2006

ISSN: 1445-2782

history

	Date:	Version:
	25 January 2006	Original statement
You are here	11 August 2006	Archived

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