ATO ID 2008/44: Capital Allowances: business related costs - in relation to a business proposed to be carried on
Date of decision: 29 January 2008
Year of income: Year ended 30 June 2008
Business line: Public Groups and International

Issue
Was the taxpayer's capital expenditure incurred 'in relation to a business proposed to be carried on' for the purposes of paragraph 40-880(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The taxpayer's capital expenditure was not incurred 'in relation to a business proposed to be carried on' for the purposes of paragraph 40-880(2)(c) of the ITAA 1997 because it is not reasonable to conclude, at the time the expenditure was incurred, that a commitment by the taxpayer to commence business exists.

Facts
The taxpayer conducts a business on a purpose designed site. They carry on the business wholly for a taxable purpose. A necessary part of the taxpayer's business is the maintenance of a licence from a government authority to carry on that business. In order for the taxpayer to maintain the necessary licence from the government authority, they must comply with a condition that they provide the government authority with a financial assurance in respect of the licence. The financial assurance is intended to provide a guarantee that, amongst other things, certain remedial costs in respect of the taxpayer's business are not borne by the community. The taxpayer sought to satisfy their obligation to provide a financial assurance by incorporating a company (the company) into which the taxpayer subscribed capital to establish a pool of funds. The subscription of capital occurred by the taxpayer subscribing for shares in the company upon its establishment and then on a quarterly basis until the fund reached (and maintained) the maximum amount required by the government authority. The taxpayer is expected to fund any remedial action from their own resources and not from the financial assurance fund. That is, the company will not use the money in the fund to carry out remedial action on behalf of the taxpayer as a matter of course. This is only done in circumstances where the taxpayer fails to carry out that action themselves. In this respect, the company has the ability to undertake the remedial work itself (or assume responsibility for the work being done). The government authority is also able to claim against the fund for reimbursement if the government authority is required to undertake remedial action. The share subscription is capital expenditure incurred on or after 1 July 2005.

Reasons for decision
Summary: All references to legislation in this Interpretative Decision are to the ITAA 1997 unless otherwise stated. Subject to the limitations and exceptions contained in subsections 40-880(3) to 40-880(9), subsection 40-880(2) 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: To ascertain whether paragraph 40-880(2)(c) applies in this case, any proposed business of the company must be considered. Subsection 40-880(7) states that: You cannot deduct an amount under paragraph 2(c) in relation to a *business proposed to be *carried on unless, having regard to any relevant circumstances, it is reasonable to conclude that the business is proposed to be carried on within a reasonable time. In considering the term 'proposed to be', paragraphs 2.31 and 2.32 of the Explanatory Memorandum to Tax Laws Amendment (2006 measures No. 1) Bill 2006 (the EM) state: 2.31 For a business to be proposed to be carried on for the purposes of this provision, the taxpayer needs to be able to demonstrate a commitment of some substance to commence the business, and sufficient identity about the business that is proposed to be carried on. The deductibility of expenses in advance of the business being carried on will rest on the facts of each case, but this commitment and identity must be tangible; that is, there would need to be some evidence that would enable an objective assessment of the existence of that commitment and identity. 2.32 Further guidance as to the level of commitment required to deduct pre-business expenditure is provided by subsection 40-880(7). In essence, this requires that, having regard to relevant circumstances, it must be reasonable to conclude that the commitment exists... In the present case, the taxpayer is expected to undertake any remedial action in respect of their business operation from their own financial resources and not from the financial assurance. Further if the taxpayer does not take remedial action, the government authority will be able to claim against the fund for reimbursement if the government authority is required to undertake the remedial action. In these circumstances, the fund will only be accessed by the government authority where the taxpayer fails to carry out remedial action themselves. The company will also have the ability to undertake the remedial action itself in respect of the site operated by the taxpayer. However, the company will not use the money in the fund to carry out remedial action on behalf of the taxpayer as a matter of course. This is only done in circumstances where the taxpayer fails to carry out those actions or it is agreed between the company and the government authority that instead of the government authority, the company will attend to the remedial action. Further, the company is not permitted to operate as a trading company. In all the circumstances the company will act primarily as a repository for the fund and it is not reasonable to conclude that a commitment by the company to commence a business exists. Whilst it is in the bounds of possibility that the company may carry on a business in the future in the event it is required to attend to the clean-up requirements of the taxpayer, that possibility is not sufficient to satisfy the requirements of paragraph 40-880(2)(c) and subsection 40-880(7). Accordingly, there is no issue of the taxpayer's share subscription expenditure being incurred 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)(c) 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)
Related ATO interpretative decisions: ATO ID 2007/94 | ATO ID 2008/43 | ATO ID 2008/45
Other references: Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 1) Bill 2006
Subject references: Blackhole expenditure Capital Allowances CoE Capital expenditure