Edited version of private advice

Authorisation Number: 1052044700429

Date of advice: 24 October 2022

Ruling

Subject: Depreciation intangible asset

Question 1

Are the expenses paid for customer listing deductible under section 8-1 or section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. The customer listing is considered as part of the business goodwill and of capital nature. It is not deductible under section 8-1 or section 40-880 of ITAA 1997.

Question 2

Can the expenses paid for customer listing be depreciated under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. The customer listing is an intangible asset and not a depreciating asset. Therefore, it cannot be depreciated under Division 40 of ITAA 1997.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On XX November 20XX company A entered into a contract of business sale with Company B to purchase the business.

Per the contract:

Company B was required to provide to the company USB stick containing full customer list by the settlement date.

The purchase of the business was completed on X December 20XX.

The Contract of Business Sale and the Item Schedule to the Contract were provided with the application and stated stock-in-trade or plant & equipment are not applicable in this transaction.

Company A and company B were acting at arm's length.

On X XXX 20XX a Contract of Fulfillment Agreement were signed by both Company C and the company A to terminate the existing Appointing Agreement and distribution arrangements with effect from X XX 20XX.

The Contract of Fulfilment Agreement was provided with the application. The contract required company A to provide company C the customer and sub-agents' information. Company C paid company A $XX for releasing each other from the existing appointment agreement.

A new Retail Agency Agreement between the company A and Company C commenced from X XXX 20XX.

The Director of the company stated that the business has two main components: distribution and retail. The Director estimated that the distribution income dropped by 100% and the retail income dropped by XX% due to the previous clients from distribution service reduced their visits to the shop.

The Fulfilment payment was treated as income for the relevant income year, the Director is of the view that the payment was for him to manually load the customer details into Company C's distribution system, which is the payment for his labour work.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act Division 40

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 112-30

Reasons for decision

Section 8-1

Section 8-1 of ITAA 1997 contains the general rules for deductibility. It consists of both positive limbs (those provisions which set out the criteria necessary for a loss or outgoing to be deductible) and negative limbs (those provisions which set out exclusions from deductibility).

Subsection 8-1(2) of ITAA 1997 contains the negative limbs and restricts the availability of a deduction to the extent that the expenditure. To be deductible, the payment must satisfy one of the positive limbs, and not be excluded by any of the negative limbs.

A deduction is not allowed under section 8-1 where, relevantly, the loss or outgoing is capital or of a capital nature under subsection 8-1(2) of ITAA 1997.

Section 40-880

Section 40-880 of ITAA 1997 provides a deduction for certain business-related capital expenditure incurred on or after 1 July 2005 (commonly referred to as 'blackhole expenditure').

Paragraph 40-880(5)(f) provides:

You cannot deduct anything under this section for an amount of expenditure you 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.

Depreciating asset

Subsection 40-30(1) of ITAA 1997 provides that a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except:

(a) land; or

(b) an item of trading stock; or

(c) an intangible asset, unless it is mentioned in subsection (2).

An intangible asset is not a depreciating asset unless it is listed in subsection 40-30(2) of ITAA 1997 which includes:

(d) in-house software

'In house software' is defined in s 995-1(1) of ITAA 1997 as computer software (or a right to use computer software), that a taxpayer acquires, develops or commissions and that is 'mainly' for the 'taxpayer' to use in performing the functions for which the software was developed (ie not mainly for sale), and for which no amount can be deducted outside Division 40 of ITAA 1997 (capital allowances) and Division 328 of ITAA 1997 (small business entities).

The definition requires the software to be used by you in performing the functions for which it was developed.

Goodwill

Section 108-5 of the ITAA 1997 provides that goodwill is Capital Gains Tax (CGT) asset. All elements that make up the goodwill of the company, such as the business name, customer list, supplier references.

Paragraphs 50 to 52 of Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business (TR 1999/16) discusses when goodwill is acquired. When goodwill is acquired on the acquisition of a business under a contract, the purchaser acquires it on the day the contract is entered into in accordance with CGT event A1.

Subsection 116-40(1) provides that where a taxpayer receives a payment from a transaction that relates to more than one CGT event, the capital proceeds apportioned to each event are so much of the payment as is reasonably attributable to that event.

In the absence of an agreed allocation, a party to a business sale is required to allocate the sale proceeds to the underlying assets (tangible and intangible) that form the assets of the business that were subject of the transaction.

TR 1999/16 sets out the Commissioner view as to the allocation of capital proceeds to goodwill. Whilst specifically in relation to goodwill, the principles may in part be applied to other CGT assets.

The Commissioner, at paragraph 43 of TR 1999/16 sets out the requirements for the Commissioner to accept allocation to goodwill agreed between the parties. Those which are also relevant to other CGT assets are as follows:

Parties to an agreement for the sale of a business often allocate a discrete part of the sale proceeds to goodwill. We will accept the amount a vendor and purchaser attribute or allocate to goodwill as capital proceeds for goodwill provided that all of the following requirements are met:

(a) The vendor owns the goodwill of the business, is entitled to dispose of it and has actually disposed of the goodwill in disposing of the business.

(b) The parties are dealing with each other at arm's length in transacting the sale and in allocating the capital proceeds...

At paragraph 44 of TR 1999/16, the Commissioner further states that '(i)n determining whether the parties are dealing at arm's length in transacting the sale and in allocating the sale proceeds especially to goodwill, all relevant circumstances are taken into account'. One of the factors considered in determining whether the parties are dealing at arm's length is '(i)f the amount allocated to goodwill is above or below the market value of the goodwill'.

Expenditure you incurred for purchasing business formed part of the cost base relate to your business' goodwill. As per section 112-30 of the ITAA 1997, you are required to apportion the cost base and reduced cost base using the apportionment rules in section 112-30 of the ITAA 1997, so that you include only that part of the expenditure that is reasonably attributable to that element for each asset.

Section 40-880(5)(f) provides that no amount is deductible where it could be taken into account in working out a capital gain or loss from a CGT event.

Application to your circumstance

The company entered into the Contract of Business Sale in 20XX. In the contract, it stated that the stock-in trade or plant & equipment are not applicable, and no other tangible assets were listed in the Contract. The whole purchase price should be allocated to the goodwill of the business, including the customer lists. The company acquired the goodwill on the day the contract is entered into in accordance with CGT event A1.

Although the customer list is stored in a software, the value of the customer list is not the software itself, but the value of the customer information stored in the software. Furthermore, the company did not develop the software, but purely used the software to store the customer information. The customer listing is not considered as in-house software. It is not a depreciating asset listed in subsection 40-30(2) of the ITAA 1997. Conclusively, the customer listing is part of the goodwill, an intangible asset for the business, which is not a depreciating asset under Division 40 of ITAA 1997.

The expenditure the company paid for the customer listing were of capital nature, therefore not deductible under section 8-1 of ITAA 1997.

Furthermore, no deduction is available under section 40-880 for expenditure such as goodwill incurred in establishing a business because such expenditure is recognised in the cost base of an asset under the CGT provisions.