ATO ID 2007/89: Capital allowances: business related costs - limitation to deduction - taken into account for capital gains tax (CGT) purposes.
Date of decision: 6 February 2007
Year of income: Year ended 30 June 2007
Business line: Public Groups and International

Issue
Is the taxpayer's deduction under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) for capital expenditure they incurred in relation to their business excluded to any extent by paragraph 40-880(5)(f) of the ITAA 1997?

Decision
Yes. The taxpayer's deduction under section 40-880 of the ITAA 1997 for capital expenditure they incurred in relation to their business is excluded in part by paragraph 40-880(5)(f) of the ITAA 1997 because the expenditure on bus tyres will be taken into account in working out the capital gain or loss from a CGT event.

Facts
The taxpayer conducts a bus charter business as a sole trader. They carry on that business wholly for a taxable purpose. Based on photographs and information provided by the seller, the taxpayer paid a holding deposit on a second-hand bus to replace an older bus being used in the taxpayer's business. The second-hand bus was located in another State. The taxpayer incurred capital expenditure on an airfare to travel to where that bus was located so as to take delivery of the bus and drive it back to where their business is carried on. The taxpayer also incurred capital expenditure on having new tyres fitted to the bus in anticipation of driving it back to their place of business. After inspecting the bus, the taxpayer decided not to continue with the purchase. The taxpayer subsequently purchased a return airfare back to their place of business. While the taxpayer had their deposit refunded, they decided to leave the new tyres fitted to the second hand bus because it was not worth their time, effort and cost of removing and returning the new tyres and finding other replacement tyres. The original tyres had been discarded when the new tyres were fitted. The taxpayer's capital expenditure was incurred 'in relation to your business' for the purpose of paragraph 40-880(2)(a) of the ITAA 1997 and the taxpayer's deduction for that expenditure under section 40-880 of the ITAA 1997 is not limited under subsection 40-880(3) of the ITAA 1997. The expenditure was incurred after 30 June 2005.

Reasons for decision
Summary: Subsections 40-880(5) to 40-880(9) of the ITAA 1997 set out limitations and exclusions to deductibility under section 40-880 of the ITAA 1997. In particular, paragraph 40-880(5)(f) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that it could, apart from section 40-880, be taken into account in working out the amount of a capital gain or capital loss from a CGT event. In this case, the taxpayer incurred capital expenditure on airfares and new bus tyres. As the taxpayer did not proceed with the purchase of the bus, there is no question of whether the airfares could be taken into account in calculating a capital gain or capital loss from a CGT event for the purposes of paragraph 40-880(5)(f) of the ITAA 1997. On the other hand, the taxpayer did purchase the new bus tyres. The tyres are CGT assets as defined in section 108-5 of the ITAA 1997 and the taxpayer's expenditure on purchasing them is included in the cost base of the tyres. It follows that the taxpayer's expenditure on purchasing the new bus tyres will be taken into account in working out the capital gain or loss from a CGT event that happens to the tyres and paragraph 40-880(5)(f) of the ITAA 1997 does apply. Accordingly, the taxpayer's deduction under section 40-880 of the ITAA 1997 for capital expenditure they incurred on bus tyres is excluded by paragraph 40-880(5)(f) of the ITAA 1997 because the expenditure will be taken into account in working out the capital gain or loss from a CGT event.

Legislative references: Income Tax Assessment Act 1997 section 40-880 paragraph 40-880(2)(a) subsection 40-880(3) subsection 40-880(5) paragraph 40-880(5)(f) subsection 40-880(6) subsection 40-880(7) subsection 40-880(8) subsection 40-880(9) subsection 108-5
Related ATO interpretative decisions: ATO ID 2007/87 | ATO ID 2007/88
Subject references: Blackhole expenditure Capital Allowances CoE Capital expenditure Capital gains tax CGT cost base Depreciating assets First element cost