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Edited version of your written advice
Authorisation Number: 1013027911163
Date of advice: 6 June 2016
Ruling
Subject: Deductibility of the purchase of client policies
Question and Answer
Are you entitled to a deduction under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) for the expense incurred to purchase client policies?
No.
This ruling applies for the following periods:
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of, and are to be read with, this description. The relevant documents are:
• Your application for a private ruling with annexures
• Client sale agreement (annexures not provided).
You are a company in the financial services industry.
You entered into a client sale agreement during the relevant income tax year to acquire client service rights from a third party (the vendor) in a similar business to you. The vendor relinquished any further association with the listed clients by way of a restraint of trade clause in the agreement.
You have provided relevant clauses of your agreement which detail the obligations of the parties.
The tax invoice describes the purchase as client policies as per the agreement.
For accounting purposes you have recorded the purchase as an intangible asset.
There has been no change to the nature of your business operations, other than expansion, since the acquisition of the service rights.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 40-880
Income Tax Assessment Act 1997 section 108-5
Income Tax Assessment Act 1997 subsection 110-25(2)(a) of the ITAA 1997
Reasons for decision
Business related costs - section 40-880
Subsection 40-880(2) of the Income Tax Assessment Act 1997 (ITAA 1997) allows certain business capital expenditure to be deducted in equal proportions over five income years. This includes capital expenditure that a taxpayer incurs in relation to their business (paragraph 40-880(2)(a) of the ITAA 1997).
Paragraph 40-880(5)(f) of the ITAA 1997 provides that taxpayers cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure they incur to the extent that 'it could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event'.
Paragraph 50 of Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues explains that in the context of paragraph 40-880(5)(f) of the ITAA 1997 the words do not require that the capital expenditure be actually taken into account in working out a capital gain or capital loss.
Capital gains tax asset
Under subsection 108-5(1) of the ITAA 1997, a capital gains tax (CGT) asset is any kind of property or a legal or equitable right that is not property. The definition also includes 'part of, or an interest in' a CGT asset (paragraph 108-5(2)(a) of the ITAA 1997).
We consider that the client policies acquired by the company satisfy the definition of a CGT asset and therefore could be taken into account in working out the amount of a capital gain or capital loss from a CGT event.
The first element of the cost base of a CGT asset includes the money a taxpayer paid (or is required to pay) to acquire the asset (paragraph 110-25(2)(a) of the ITAA 1997).
Therefore the money you paid or are required to pay in respect of acquiring the client policies is the first element of the cost base.
Conclusion
You believe that none of the exclusions in section 40-880 of the ITAA 1997 apply, however, as the cost of acquiring the client policies would be taken into account in working out the capital gain or capital loss when any CGT event happens to the client policies you are prevented by paragraph 40-880(5)(f) of the ITAA 1997 from deducting the expenditure for the client policies under subsection 40-880(2) of the ITAA 1997.