ATO Interpretative Decision
ATO ID 2009/6
Income Tax
Capital Allowances: business related costs - amount you can deduct - income year in which business ceasesFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can the taxpayer deduct, under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997), the balance of any undeducted qualifying expenditure for the income year in which it stops carrying on the business to which the expenditure relates?
Decision
No. The taxpayer cannot deduct, under section 40-880 of the ITAA 1997, the balance of any undeducted qualifying expenditure for the income year in which it stops carrying on the business to which the expenditure relates. Subsection 40-880(2) of the ITAA 1997 prescribes that a deduction is allowed for qualifying expenditure in equal proportions over a period of five income years starting in the year in which the expenditure is incurred.
Facts
During the 2005-06 income year the taxpayer, a company, incurred capital expenditure that qualified for deduction as business related costs under section 40-880 of the ITAA 1997.
The taxpayer deducted 20% of the qualifying expenditure under section 40-880 of the ITAA 1997 for each of the 2005-06, 2006-07 and 2007-08 income years.
The company ceased carrying on the business to which the expenditure related during the 2008-09 income year. It is also proposed that the taxpayer be wound up during the 2008-09 income year.
Reasons for Decision
Subject to the limitations and exceptions contained in subsections 40-880(3) to (9) of the ITAA 1997, subsection 40-880(2) of the ITAA 1997 provides that you can deduct, in equal proportions over a period of five 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.
That is, subsection 40-880(2) of the ITAA 1997 prescribes that 20% of the qualifying expenditure is deductible for the income year in which the expenditure is incurred and then 20% for each of the next four income years.
Subject to the application of the non-commercial loss provisions in Division 35 of the ITAA 1997, the deduction allowable under section 40-880 of the ITAA 1997 for any particular income year is determined as at the time the expenditure is incurred and does not necessarily depend on the business to which the expenditure is related being carried on during the year of deduction. Subsection 40-880(2) of the ITAA 1997 recognises this by allowing a deduction in relation to a business that 'is, was or will be' carried on. There is no basis in section 40-880 of the ITAA 1997 to allow a deduction for an amount greater than 20% of the qualifying expenditure for any income year or to alter the timing of that deduction.
In this case, the taxpayer incurred the qualifying expenditure in the 2005-06 income year and deducted 20% of the expenditure for each of the 2005-06, 2006-07 and 2007-08 income years. Under section 40-880 of the ITAA 1997, the taxpayer is entitled to deduct 20% of the expenditure for each of the 2008-09 and 2009-10 income years notwithstanding the taxpayer ceased to carry on the business to which the qualifying expenditure related during the 2008-09 income year.
If, however, the taxpayer is wound up during the 2008-09 income year, it will be unable to claim a deduction for the 2009-10 income year as it was the entity that incurred the qualifying expenditure and it will not exist for any part of that income year. Entitlement to deduction under section 40-880 of the ITAA 1997 is limited to the taxpayer who incurs the qualifying expenditure and the entitlement to that deduction is not transferable to any other taxpayer.
Date of decision: 7 January 2009Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1997
section 40-880
subsection 40-880(2)
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)
Division 35
Keywords
Blackhole expenditure
Capital Allowances CoE
Capital expenditure
Deductions & expenses
ISSN: 1445-2782