ATO Interpretative Decision

ATO ID 2008/108

Income Tax

Issue

Is there a business 'proposed to be' carried on for the purposes of paragraph 40-880(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. There is not a business 'proposed to be' carried on for the purposes of paragraph 40-880(2)(c) of the ITAA 1997 as the taxpayer failed to demonstrate that, as at the time they incurred the expenditure, there existed sufficient identity about the business to be carried on.

Facts

The taxpayer incurred capital expenditure travelling to another country to investigate the viability of a business venture in that country.

Before incurring the expenditure, the taxpayer conducted some research into the viability of the business venture and developed a business plan.

At the time they incurred the expenditure, decisions had not been made as to:

•

the entity through which the business would be conducted

•

the range of activities the business would undertake

•

whether the core business activities would be carried on in Australia or the other country

•

whether the taxpayer's business entity would act in its own right in the other country or whether agents would be established in the other country.

Following the taxpayer's return to Australia, a decision was made not to proceed with the business venture.

The taxpayer incurred the capital expenditure after 30 June 2005.

Reasons for Decision

(All legislative references are to the ITAA 1997)

Subject to the limitations and exceptions contained in subsections 40-880(3) to 40-880(9), subsection 40-880(2) provides that you can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur:

(a)

in relation to your business; or

(b)

in relation to a business that used to be carried on; or

(c)

in relation to a business proposed to be carried on, or

(d)

to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.

On the facts of this case, the relevant paragraph to consider is paragraph 40-880(2)(c) because the expenditure was incurred prior to the commencement of any business.

In considering the phrase 'a business proposed to be carried on', paragraphs 2.31, 2.32 and 2.33 of the Explanatory Memorandum to Tax Laws Amendment (2006 measures No. 1) Bill 2006 ('the EM') state:

2.31 For a business to be proposed to be carried on for the purposes of this provision, the taxpayer needs to be able to demonstrate a commitment of some substance to commence the business, and sufficient identity about the business that is proposed to be carried on. The deductibility of expenses in advance of the business being carried on will rest on the facts of each case, but this commitment and identity must be tangible; that is, there would need to be some evidence that would enable an objective assessment of the existence of that commitment and identity.

2.32 Further guidance as to the level of commitment required to deduct pre-business expenditure is provided by subsection 40-880(7). In essence, this requires that, having regard to relevant circumstances, it must be reasonable to conclude that the commitment exists. One of these circumstances is that the business be proposed to be carried on within a reasonable time. This may vary according to the industry or the nature of the business and would recognise the long lead times that may be involved. [Schedule 2, item 30, paragraph 40-880(2)(c), subsection 40-880(7)].

2.33 Such commitment could be shown by, but is not limited to, at least some of the following:

•

a business plan;

•

the establishment of a business premises;

•

research into the likely markets or profitability of the business; and

•

capital investment in assets of the business.

Eligibility for deduction under section 40-880 is established as at the time when the expenditure is incurred: see paragraph 2.40 of the EM. Therefore, for the purposes of paragraph 40-880(2)(c), a taxpayer needs to demonstrate that, as at the time they incurred the relevant expenditure, there existed a commitment of some substance to commence the business and sufficient identity about the business to be carried on.

In this case, some research into the viability of the business venture was conducted and a business plan was prepared. However, decisions as to how the business would be structured, what activities would be carried on, and how and where they would be carried on, had not been made at the time that the expenditure was incurred by the taxpayer. The fact that no clear decision had been made on any of these issues at the time of the taxpayer's incurrence of the expenditure indicates that it has not been demonstrated that sufficient identity about the business to be carried on existed at that time.

Accordingly, we consider that the capital expenditure that the taxpayer incurred to investigate the viability of a business venture in the other country is not, for the purposes of paragraph 40-880(2)(c), capital expenditure that they incurred in relation to a business proposed to be carried on.

Year of income:  Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   section 40-880
   subsection 40-880(2)
   Paragraph 40-880(2)(c)
   subsection 40-880(3)
   subsection 40-880(4)
   subsection 40-880(5)
   subsection 40-880(6)
   subsection 40-880(7)
   subsection 40-880(8)
   subsection 40-880(9)

Other References:
Explanatory Memorandum to Tax Laws Amendment (2006 measures No. 1) Bill 2006

Keywords
Blackhole expenditure
Business income
Capital expenditure
Carrying on a business
Commencement of business
Deductions & expenses
Income
International travel
Overseas travel expenses
Travel expenses

Siebel/TDMS Reference Number:  5829345

Business Line:  Public Groups and International

Date of publication:  18 July 2008

ISSN: 1445-2782