ATO Interpretative Decision

ATO ID 2006/209 (Withdrawn)

Income tax

Capital Allowances: business related costs - expenditure to convert your business structure - 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This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 deduction under paragraph 40-880(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for capital expenditure incurred by a taxpayer to convert their business structure to a different structure reduced, if the taxpayer, within the converted structure, establishes a separate business structure through which a business is carried on for other than a taxable purpose?

Decision

Yes. Paragraph 40-880(1)(b) of the ITAA 1997 requires the deduction for capital expenditure incurred by the taxpayer to convert their business structure to a different structure to be reduced, because the taxpayer, within the converted business structure, established a separate business structure through which they conduct business activities that are not carried on for a taxable purpose.

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 (Structure A), carries on business for a taxable purpose.

Following the conversion to Structure A, the taxpayer entered into a separate legal relationship with an unrelated entity to conduct certain other business activities. Entering into this other legal relationship established a separate business structure (Structure B) to Structure A. The establishment of Structure B was planned as part of the overall business that would be carried on through Structure A.

The business conducted through Structure B is not carried on for a taxable purpose.

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.

For the purpose of section 40-880 of the ITAA 1997, 'your business structure' refers to the structure through which your business will be carried on. Generally speaking, this covers the legal entity or the legal relationship that constitutes the structure with which business will be carried on for a taxable purpose, and that will hold the business assets. In this sense, business structure is a system, mode, or arrangement of parts, elements or constituents, considered from the point of view of the whole rather than of any single part, that gives the form and organisation through which your business is conducted.

Hence, 'business structure' goes to such matters as how the entity acts, conducts business and uses their assets as an economic group. Indicators that a particular form of relationship or organisation represents 'your business structure' for the purposes of section 40-880 of the ITAA 1997 include that form of relationship containing features of ownership, control, profit distribution and liability and being recognised in corporations law or on the Australian Stock Exchange.

The establishment of Structure B followed the successful conversion to Structure A through the merger arrangement. Although Structure A and Structure B are separate business structures, the taxpayer's business carried on through Structure A encompasses the activities conducted through both business structures. It is, therefore, necessary to consider the taxpayer's business activities through both structures in determining the extent to which the taxpayer's business is being carried on for a taxable purpose.

The taxpayer is, therefore, required to reduce their deduction under paragraph 40-880(1)(b) of the ITAA 1997 for the capital expenditure they incurred to convert their business structure to another structure to the extent that the taxpayer's business, which includes that conducted through Structure B, is not carried on for a taxable purpose.

Date of decision: 25 January 2006

Year of income: Year ended 30 June 2005

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

Related ATO Interpretative Decisions
ATO ID 2006/207
ATO ID 2006/208

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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