ATO ID 2008/107: Capital allowances: business related costs - business proposed to be carried on
Date of decision: 6 March 2008
Year of income: Year ended 30 June 2007
Business line: Public Groups and International

Issue
Was the 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
Yes. The business was 'proposed to be' carried on for the purposes of paragraph 40-880(2)(c) of the ITAA 1997, as the taxpayer demonstrated a commitment of some substance to commence the business, and, sufficient identity about the business proposed to be carried on and it is reasonable to conclude the business was proposed to be carried on within a reasonable time.

Facts
The taxpayer incurred capital expenditure to incorporate a company. The taxpayer became a director and shareholder of the company upon its incorporation. The taxpayer intended the company to carry on a business. Within two months of its incorporation, the company: For various reasons, the company never traded and the taxpayer resigned as director after several months. The business never commenced. The taxpayer incurred the capital expenditure after 30 June 2005 to incorporate the company.

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 5 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 business proposed to be carried on 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, 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, at the time the taxpayer incurred the capital expenditure to incorporate the company, they needed to demonstrate, for the purposes of paragraph 40-880(2)(c), a commitment of some substance to commence the business and sufficient identity about the business proposed to be carried on by the company. Soon after the company's incorporation, the company entered into a lease for business premises and rent was paid for 2 months. Within the following months business cards were printed, the business premises fitted out, an insurance policy taken out and a 'partnership agreement' entered into with another entity to enable the company to supply certain services to clients. This demonstrates a commitment of some substance to commence the business, and sufficient identity about the business proposed to be carried on. Furthermore, given the close proximity in time from when the taxpayer's expenditure on company establishment fees was incurred and when the above activities were conducted, it is reasonable to conclude that this commitment existed at the time the taxpayer incurred the expenditure. It is also reasonable to conclude that the business was proposed to be carried on within a reasonable time. Accordingly, the business was proposed to be carried on by the company for the purposes of paragraph 40-880(2)(c). This view is not negated by the fact that the company's business did not commence.

Legislative references: Income Tax Assessment Act 1997 Division 35 section 40-880 subsection 40-880(2) Paragraph 40-880(2)(a) Paragraph 40-880(2)(b) Paragraph 40-880(2)(c) Paragraph 40-880(2)(d) 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)
Other references: Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No.1) Bill 2006
Subject references: Blackhole expenditure Commencement of business Incorporation expenses Non commercial losses Capital Allowances CoE