ATO Interpretative Decision

ATO ID 2010/69

Income Tax

Capital Allowances: business related costs - limitation of deduction - could be taken into account in working out the amount of a capital gain or capital loss - time allowed to amend assessment expired
FOI status: may be released

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

If the amendment period in section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) has expired and the taxpayer's capital expenditure forms part of the cost base of a capital gains tax (CGT) asset but was not taken into consideration when working out the taxpayer's net capital gain for the relevant income year, is that capital expenditure 'taken into account in working out a capital gain or capital loss from a CGT event' for the purpose of paragraph 40-880(5)(f) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. As the taxpayer's capital expenditure forms part of the cost base of a CGT asset, it could be taken into account in working out the amount of a capital gain from a CGT event for the purposes of paragraph 40-880(5)(f) of the ITAA 1997. The application of paragraph 40-880(5)(f) of the ITAA 1997 is not affected by the expiry of amendment periods prescribed by section 170 of the ITAA 1936.

Facts

The taxpayer sold a business which they had carried on - they disposed of all of the assets of the business, including the goodwill. A CGT event happened to the assets when the taxpayer disposed of them and, as a result, the taxpayer included a net capital gain in their assessable income for the income year in which the CGT event happened.

Subsequently, the purchaser of the business commenced legal action against the taxpayer for allegedly misrepresenting the value of the goodwill of the business. For several income years after the one in which the CGT event happened, the taxpayer incurred legal fees in relation to the legal action.

The legal fees are capital expenditure incurred in relation to a business the taxpayer used to carry on for the purposes of paragraph 40-880(2)(b) of the ITAA 1997. The fees are also incidental costs of the disposal of the goodwill of the business and form part of the cost base of the goodwill.

The amount of the capital gain made from the CGT event happening to the goodwill was worked out using a cost base of the goodwill which did not include the legal fees. Therefore, the legal fees were not reflected in the net capital gain included in the taxpayer's assessable income in the year in which the CGT event happened.

The time allowed by section 170 of the ITAA 1936 to amend the taxpayer's assessment for the income year in which the CGT event happened has expired.

Reasons for Decision

Section 40-880 of the ITAA 1997 allows certain business capital expenditure to be deducted in equal proportions over five income years. Paragraph 40-880(5)(f) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 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'.

In most cases, capital proceeds and cost base (or reduced cost base) are taken into account in working out the amount of a capital gain or capital loss from a CGT event. Therefore, capital expenditure which reduces capital proceeds from a CGT event or forms part of the cost base (or reduced cost base) of a CGT asset could be taken into account in working out the amount of a capital gain or capital loss from a CGT event for the purposes of paragraph 40-880(5)(f) of the ITAA 1997.

In the present case, the capital expenditure forms part of the cost base of the goodwill and, therefore, could be taken into account in working out the capital gain made from the CGT event that happened to the goodwill.

However, an issue arises where the expenditure is then not reflected in the net capital gain included in the taxpayer's assessable income for the income year in which the CGT event happened because the time allowed by section 170 of the ITAA 1936 to amend the taxpayer's assessment for that income year has expired.

Whether capital expenditure could be taken into account in working out the amount of a capital gain or capital loss from a CGT event for the purposes of paragraph 40-880(5)(f) of the ITAA 1997 pays no regard to the inability of the taxpayer to amend the net capital gain for the income year in which the CGT event happened. Expenditure could be taken into account in working out the amount of a capital gain or capital loss from a CGT event even though it was not able to be reflected in the net capital gain included in a taxpayer's assessable income for an income year and the time allowed by section 170 of the ITAA 1936 to amend the taxpayer's assessment for that income year has expired.

In the present case, the legal fees form part of the cost base of the goodwill of the business. Therefore, the legal fees could be taken into account in working out the amount of a capital gain or capital loss from a CGT event for the purposes of paragraph 40-880(5)(f) of the ITAA 1997, despite the fact that the time allowed by section 170 of the ITAA 1936 to amend the taxpayer's assessment for the income year in which the CGT event happened has expired.

Date of decision:  17 March 2010

Year of income:  Year ended 30 June 2008

Legislative References:
Income Tax Assessment Act 1997
   section 40-880
   paragraph 40-880(2)(b)
   paragraph 40-880(5)(f)

Income Tax Assessment Act 1936
   section 170

Keywords
Blackhole expenditure
Capital Allowances CoE
Capital gains
Capital losses
Net capital gains

Siebel/TDMS Reference Number:  5822673

Business Line:  Public Groups and International

Date of publication:  26 March 2010

ISSN: 1445 - 2782