ATO Interpretative Decision
ATO ID 2007/110
Income Tax
Capital Allowances: business related costs - in relation to your business - carried on for a taxable purposeFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Was the taxpayer's business carried on wholly for a taxable purpose for the purposes of subsection 40-880(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The taxpayer's business was carried on wholly for a taxable purpose for the purposes of subsection 40-880(3) of the ITAA 1997 because the taxpayer's business was both being carried on for a taxable purpose and the taxpayer did not, as at the time the relevant capital expenditure was incurred, anticipate (by reference to all known and predictable facts in all years) entering into any activities that would result in the taxpayer deriving exempt or non-assessable non-exempt income.
Facts
The taxpayer, a public company limited by shares that carried on business for a taxable purpose, was approached by an unrelated entity with a proposal for the two companies to merge. The taxpayer had not been actively seeking any such offers at the time the offer was made but decided to proceed with the merger.
The taxpayer incurred capital expenditure on or after 1 July 2005 in respect of evaluating the merger proposal, changing its constitution to facilitate the merger, and implementing the scheme of arrangement. The capital expenditure was incurred in relation to its business for the purposes of paragraph 40-880(2)(a) of the ITAA 1997.
As at the time the capital expenditure was incurred, the taxpayer did not anticipate entering into any activities that would result in the taxpayer deriving exempt or non-assessable non-exempt income.
Reasons for Decision
Subsection 40-880(3) of the ITAA 1997 provides that 'you can only deduct the expenditure, for a business that you carry on, used to carry on or propose to carry on, to the extent that the business is carried on, was carried on or is proposed to be carried on for a taxable purpose'. The business referred to in this subsection is the business to which the relevant paragraph in subsection 40-880(2) of the ITAA 1997 applies. In this case it is paragraph 40-880(2)(a) of the ITAA 1997 that applies and therefore the issue is the extent to which the business that the taxpayer carries on is carried on for a taxable purpose.
The Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 states:
2.46 The definition of 'taxable purpose' is provided by subsection 40-25(7) of the ITAA 1997 and covers various purposes, including the purpose of producing assessable income. The term
purpose of producing assessable income
is further defined in subsection 995-1(1) of the ITAA 1997 as being something done:
2.47 A taxpayer whose business is not carried on for a taxable purpose cannot deduct expenditure to that extent. This limitation is not an annual test: that is, it is not to limit deductions to only the income years in which the business is carried on for a taxable purpose. The test as to the taxable purpose of the business is applied - as at the time the expenditure is incurred - to the taxable purpose of the business by reference to all known and predictable facts in all years.
The application of subsection 40-880(3) of the ITAA 1997 requires that the taxpayer determine, as at the time the capital expenditure was incurred, the extent to which the taxpayer's business will be carried on for a taxable purpose by reference to all known and predictable facts in all years.
The taxpayer did not derive any exempt income or non-assessable non-exempt income for the income year in which it incurred the capital expenditure. Additionally, the Scheme Booklet and Disclosure Statement issued by the taxpayer to its members outlines the impacts of the merger on the taxpayer's business. The information provided to the members was on the basis of existing circumstances affecting the taxpayer's business at the time the Booklet and Statement was prepared. It therefore provides objective evidence as to the known and predictable facts and expectations of the taxpayer in respect of the taxpayer's business as at the time the capital expenditure was incurred. The Scheme Booklet and Disclosure Statement do not make any reference to activities that would result in the taxpayer deriving exempt or non-assessable non-exempt income.
As the taxpayer, as at the time it incurred the capital expenditure, carried on its business for a taxable purpose and did not anticipate (by reference to all known and predictable facts in all years) entering into any activities that would result in the taxpayer deriving exempt or non-assessable non-exempt income, the taxpayer's business was carried on wholly for a taxable purpose for the purposes of subsection 40-880(3) of the ITAA 1997.
Date of decision: 27 April 2007Year of income: Year ended 30 June 2006
Legislative References:
Income Tax Assessment Act 1997
subsection 40-880
subsection 40-25(7)
subsection 40-880(2)
paragraph 40-880(2)(a)
subsection 40-880(3)
subsection 995-1(1)
ATO ID 2007/109
ATO ID 2007/111
ATO ID 2007/112
Other References:
Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006
Keywords
Blackhole expenditure
Capital Allowances CoE
Capital expenditure
Taxable purpose
Uniform capital allowances system
ISSN: 1445-2782