ATO ID 2007/112: Capital Allowances: business related costs - could not be taken into account in working out a capital gain or loss from a CGT event
Date of decision: 27 April 2007
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
Does paragraph 40-880(5)(f) of the Income Tax Assessment Act 1997 (ITAA 1997) apply so as to reduce the taxpayer's deduction under section 40-880 of the ITAA 1997 for capital expenditure it incurred 'in relation to your business'?

Decision
No. Paragraph 40-880(5)(f) of the ITAA 1997 does not apply so as to reduce the taxpayer's deduction under section 40-880 of the ITAA 1997 for capital expenditure it incurred in relation to its business.

Facts
The taxpayer, a public company limited by shares that carried on its business wholly for a taxable purpose, was approached by an unrelated company with a proposal for them to merge. The taxpayer had not been seeking any such offers at the time that the offer was made but decided to proceed with the merger after evaluating the proposal. The merger was implemented by a scheme of arrangement which involved the existing shares in the taxpayer being transferred from the taxpayer's members to the unrelated entity in exchange for the taxpayer's members being issued shares in the unrelated entity. The result of the arrangement was the taxpayer became a wholly owned subsidiary of the unrelated entity. 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 the implementing the scheme of arrangement. The expenditure comprised legal fees; various consulting fees; member communication expenses and other related miscellaneous expenses. The capital expenditure was incurred in relation to the taxpayer's business for the purposes of paragraph 40-880(2)(a) of the ITAA 1997.

Reasons for decision
Summary: Section 40-880 of the ITAA 1997 allows certain business capital expenditure to be deducted in equal proportions over five income years. Paragraph 40-880(5)(f) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 for an amount of expenditure you incur to the extent that 'it could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event'. In most cases, capital proceeds and cost base (or reduced cost base) are taken into account in working out a capital gain or capital loss from a capital gains tax (CGT) event. The expenditure could be taken into account in capital proceeds if it reduced the capital proceeds from a CGT event. However, no CGT event happens in respect of which there are capital proceeds that are reduced by the expenditure. The expenditure could be taken into account in cost base (or reduced cost base) if it forms part of the cost base (or reduced cost base) of a CGT asset. However, the taxpayer's expenditure does not form part the cost base (or reduced cost base) of any CGT asset. Further, the expenditure does not fit the description of any amount that forms part of the calculation of a capital gain or loss from a CGT event that is worked out without reference to either or both capital proceeds and cost base (or reduced cost base). For the foregoing reasons, paragraph 40-880(5)(f) of the ITAA 1997 does not apply so as to reduce the taxpayer's deduction under section 40-880 of the ITAA 1997 in respect of capital expenditure it incurred as set out in the facts.

Legislative references: Income Tax Assessment Act 1997 section 40-880 paragraph 40-880(2)(a) paragraph 40-880(5)(f)
Related ATO interpretative decisions: ATO ID 2007/109 | ATO ID 2007/110 | ATO ID 2007/111
Subject references: Capital Allowances CoE Capital expenditure Capital gains tax CGT capital proceeds CGT cost base CGT events CGT reduced cost base Losses and Capital Gains Tax CoE