ATO ID 2009/73: Capital Allowances: business related costs - when eligibility for deduction is established
Date of decision: 20 July 2009
Year of income: Year ended 31 March 2008
Business line: Private Groups and High Wealth Individuals

Issue
Was the capital expenditure the taxpayer incurred after they acquired a business incurred in relation to 'your business' for the purposes of paragraph 40-880(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), even though the services to which their expenditure relates were provided both before and after the business was acquired?

Decision
Yes. The capital expenditure the taxpayer incurred after they acquired the business was incurred in relation to 'your business' for the purposes of paragraph 40-880(2)(a) of the ITAA 1997 because eligibility for a deduction under section 40-880 of the ITAA 1997 is determined as at the time the expenditure is incurred.

Facts
The taxpayer is an Australian resident company that carries on a business wholly for a taxable purpose. The taxpayer acquired the business of another entity under an agreement. Upon completion of the agreement (completion), the taxpayer acquired the business of the other entity which it operated as a separate internal division of the taxpayer's existing business. The taxpayer incurred capital expenditure on legal fees for services provided by a legal service provider in the course of the acquisition of the business of the other entity. The services were provided by the legal service provider both before and after completion. The capital expenditure on legal fees was incurred by the taxpayer after completion. At that time the expenditure was incurred by the taxpayer, there was a sufficient and relevant connection between the taxpayer's incurrence of the expenditure and the business acquired by the taxpayer.

Reasons for decision
Summary: All legislative references are to the ITAA 1997 unless otherwise stated. In this case, the capital expenditure the taxpayer incurred on legal fees in acquiring the business of the other entity was for services provided both before and after completion. As a portion of the capital expenditure on legal fees incurred by the taxpayer was for services provided before completion at a time when the business of the other entity was 'a business proposed to be carried on', it is necessary to consider whether the expenditure is incurred 'in relation to your business' (paragraph 40-880(2)(a)) or 'in relation to a business proposed to be carried on' (paragraph 40-880(2)(c)). In discussing eligibility for deduction under section 40-880, paragraph 2.40 of the Explanatory Memorandum to Tax Laws Amendment (2006 Measures No.1) Bill 2006 states: Eligibility for deduction is a once only up-front test established as at the time when the expenditure is incurred. Notwithstanding that a portion of the capital expenditure on legal fees incurred by the taxpayer was for services performed by the legal service provider prior to completion, the taxpayer did not incur the capital expenditure on legal fees until after completion, at which time the business of the other entity had already been acquired. As noted above, eligibility for deduction under section 40-880 is established as at the time when the expenditure is incurred by the taxpayer. In this case, as at the time the expenditure was incurred by the taxpayer, the business of the other entity was no longer 'a business proposed to be carried on', but instead, a business carried on by the taxpayer, being the separate internal division. Therefore, the capital expenditure the taxpayer incurred was incurred 'in relation to your business' for the purposes of paragraph 40-880(2)(a) and not 'in relation to a business proposed to be carried on' for the purposes of paragraph 40-880(2)(c).

Legislative references: Income Tax Assessment Act 1997 section 40-880 subsection 40-880(2) paragraph 40-880(2)(a) paragraph 40-880(2)(c)
Related ATO interpretative decisions: ATO ID 2009/74
Other references: Explanatory Memorandum to Tax Laws Amendment (2006 Measures No.1) Bill 2006
Subject references: Blackhole expenditure Capital Allowances CoE Capital expenditure Centres of Expertise