ATO Interpretative Decision

ATO ID 2006/210 (Withdrawn)

Income Tax

Capital Allowances: business related costs - to convert your business structure to a different structure - reconstituted partnership
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This ATO ID is withdrawn as former section 40-880 of the Income Tax Assessment Act 1997 has been repealed.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 partners of an existing partnership to obtain legal advice in relation to a technical dissolution and reconstitution of the partnership '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

Yes. The legal expenses incurred by the partners are expenditure to convert the existing partnership structure to a different partnership structure for the purpose of paragraph 40-880(1)(b) of the ITAA 1997.

Facts

Partnership ABCDE carried on a business for a taxable purpose. The partnership originally had five partners, A, B, C, D and E. In the 2002-03 income year, partners A, B, C and D made a determination under the partnership agreement which resulted in partner E exiting the partnership. Partners A, B, C and D acquired the interest of exiting partner E in the partnership. The exit of partner E from the partnership resulted in a technical dissolution of partnership ABCDE. Partners A, B, C and D continued to carry on the business as reconstituted partnership ABCD.

The partners of partnership ABCDE incurred legal expenses to obtain legal advice on the formation of the reconstituted partnership and the transfer of business assets from partnership ABCDE to reconstituted partnership ABCD.

Reasons for Decision

Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(b) of the ITAA 1997 provides a deduction for capital expenditure incurred by a taxpayer to convert their business structure to a different structure. The term 'business structure' covers the legal entity or the legal relationship that is established as the entity that will carry on the business for a taxable purpose and that will hold the business assets.

The Explanatory Memorandum accompanying Taxation Laws Amendment Bill (No. 5) 2002 distinguishes between an internal reorganisation and a change in business structure and states 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 fractional interests held by the partners in the reconstituted partnership ABCD represent two different interests: one which they originally acquired when they formed partnership ABCDE; and the other which they acquired from exiting partner E upon the technical dissolution of the partnership.

The different fractional interests held by the partners in partnership ABCDE and those held in reconstituted partnership ABCD evidences a change in how the fractional interests in the different partnerships are held. This change falls within the type of structural change intended to be covered by paragraph 40-880(1)(b) of the ITAA 1997.

The technical dissolution of partnership ABCDE and reconstitution of partnership ABCD is, therefore, a conversion from one business structure to a different business structure for the purpose of paragraph 40-880(1)(b) of the ITAA 1997. Accordingly, the legal expenses incurred to obtain legal advice on the formation of the reconstituted partnership and the transfer of business assets from partnership ABCDE to reconstituted partnership ABCD satisfy the requirements of paragraph 40-880(1)(b).

That portion of the legal expenses referrable to the establishment of the reconstituted partnership may also satisfy the requirements of paragraph 40-880(1)(a) of the ITAA 1997 being 'expenditure to establish your business structure'. However, paragraph 40-880(1)(b) of the ITAA 1997 is the more appropriate paragraph to consider in the particular circumstances of this case because it applies to a conversion of structure and paragraph 40-880(1)(a) applies to the establishment of an initial business structure (see section 8-10 of the ITAA 1997).

Date of decision: 9 March 2004

Year of income: Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 8-10
   paragraph 40-880(1)(a)
   paragraph 40-880(1)(b)
   subsection 40-880(3)

Related ATO Interpretative Decisions
ATO ID 2006/211

Keywords
Blackhole expenditure
Capital expenditure
Legal expenses
Partnerships
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:
	9 March 2004	Original statement
You are here	11 August 2006	Archived

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