ATO ID 2009/42: Capital Allowances: business related costs - business proposed to be carried on
Date of decision: 11 June 2009
Year of income: Year ended 30 June 2008
Business line: Public Groups and International

Issue
Was 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) at the time the taxpayer incurred their capital expenditure?

Decision
Yes. A business was 'proposed to be' carried on for the purposes of paragraph 40-880(2)(c) of the ITAA 1997 at the time the taxpayer incurred their capital expenditure because as at that time the taxpayer demonstrated a commitment of some substance to commence to carry on the business and there was sufficient identity about the business proposed to be carried on, and it was reasonable to conclude the business was proposed to be carried on within a reasonable time.

Facts
The taxpayer, an individual, incurred capital expenditure on travel to various locations in assessing a number of particular businesses being carried on within a specific industry for their suitability to the taxpayer's plan to acquire an existing business they proposed to carry on. The taxpayer's travel included travel to attend meetings with the businesses' vendors, view the businesses' premises', meet with industry suppliers to those businesses and undertake competitor analysis. The taxpayer had extensive employment history in the relevant industry and had experience in strategic planning and analysis of potential business acquisitions in that industry. At the time the expenditure was incurred the taxpayer had: However, for various reasons a business was never acquired.

Reasons for decision
Summary: (All legislative references are to the ITAA 1997) 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: On the facts of this case, the relevant paragraph to consider is paragraph 40-880(2)(c) because the expenditure was incurred prior to the commencement of the proposed business. Subsection 40-880(7) states: 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, 2.32 and 2.33 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. One of these circumstances is that the business be proposed to be carried on within a reasonable time. This may vary according to the industry or the nature of the business and would recognise the long lead times that may be involved. [Schedule 2, item 30, paragraph 40-880(2)(c), subsection 40-880(7)]. 2.33 Such commitment could be shown by, but is not limited to, at least some of the following: • a business plan; • the establishment of a business premises; • research into the likely markets or profitability of the business; and • capital investment in assets of the business. Eligibility for deduction under section 40-880 is established as at the time when the expenditure is incurred (see paragraph 2.40 of the EM). Therefore, as at the time the taxpayer incurred the relevant capital expenditure they need to demonstrate, for the purposes of paragraph 40-880(2)(c), a commitment of some substance to commence to carry on the business and sufficient identity about the business proposed to be carried on. At the time the taxpayer incurred the capital expenditure on travel, they had identified a specific business model and concept for carrying on the business acquired as well as having made decisions as to the activities that the business would carry on. For this purpose, the taxpayer had already undertaken significant investigative/analytical work that enabled them to identify particular existing businesses against which to test their business model and concept. The taxpayer had extensive industry knowledge and a history of employment in the relevant industry and left their employment to find a suitable business to acquire and operate. They had also identified the business structure through which the business would carry on and identified the business trading name. The taxpayer took a targeted approach to identification of the potential acquisition business by narrowing the scope of the possible acquisition business to a limited number of businesses of a specific type within the relevant industry and visiting and evaluating these specific businesses. These factors demonstrate a commitment of some substance to commence to carry on a business and sufficient identity about the business proposed to be carried on, as at the time the expenditure was incurred. The substance of the taxpayer's commitment and the sufficiency of the business identity was not diminished by reason only that a number of existing businesses were being considered. As any business to be acquired was an existing operating business and was to continue trading throughout the purchase period and continue immediately after the purchase, it is reasonable to conclude that a business was proposed to be carried on within a reasonable time. Accordingly, a business was proposed to be carried on for the purposes of paragraph 40-880(2)(c) at the time that the taxpayer incurred their capital expenditure. This view is not negated by the fact that no business was subsequently acquired.

Legislative references: Income Tax Assessment Act 1997 Division 35 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 2008/107 | ATO ID 2008/108
Other references: Explanatory Memorandum to Tax Laws Amendment (2006 measures No. 1) Bill 2006
Subject references: Blackhole expenditure Business income Capital expenditure Carrying on a business Commencement of business Deductions & expenses Income