Private ruling: Purchase of a client list
Published: March 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the purchase of a client list considered the acquisition of a capital asset? | A1: Yes. | Q2: Are you entitled to a deduction under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) for the expense incurred to purchase a client list? | A2: No.

Relevant facts and circumstances: The partnership operates a business. The partnership purchased a list of client names from a small business for $X. The partnership did not acquire the business. The previous owner sent out a letter to the client base of approximately Y clients to advise that they were selling the business. They also introduced the partnership and notified clients that the partnership offered the same services.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 paragraph 110-25(2)(a) | Income Tax Assessment Act 1997 section 40-880

Reasons for decision: Summary: Under subsection 108-5(1) of the ITAA 1997, a capital gains tax (CGT) asset is any kind of property or a legal or equitable right that is not property. The first element of the cost base of a CGT asset includes the money a taxpayer paid (or is required to pay) to acquire the asset (paragraph 110-25(2)(a) of the ITAA 1997). ATO ID 2004/656 examines the taxation consequences of a business acquiring a subscriber base. This type of expenditure is incurred to enlarge the business' operations by increasing the market share and removing competitors. ATO ID 2004/656 considers the cost to be capital in nature as it results in an enlargement of the profit yielding structure of the business. This view is consistent with that expressed in Taxation Ruling TR 2000/1 which deals with the taxation consequences of acquiring insurance registers. An insurance register is a record of the rights of an insurance agent to future commissions and a record of policyholders that an agent has an exclusive right to deal with on behalf of an insurance company. TR 2000/1 considers that the expenditure incurred to acquire an insurance register would also be capital in nature. In this case, the partnership acquired a client list. Although this list does not guarantee future income, we consider that the purchase of the client list has resulted in the enlargement of the profit yielding structure of the business. Therefore, the expenditure incurred to acquire the client list is capital in nature. We consider that the client list acquired by the partnership is a CGT asset. Therefore, the cost to acquire the client list will form the first element of the cost base. Subsection 40-880(2) of the ITAA 1997 allows certain business capital expenditure to be deducted in equal proportions over five income years. This includes capital expenditure that a taxpayer incurs in relation to their business (paragraph 40-880(2)(a) of the ITAA 1997. Paragraph 40-880(5)(f) of the ITAA 1997 provides that taxpayers cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure they 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'. As discussed in question 1, the cost incurred to acquire the client list will form the first element of the cost base of the asset. The cost could be taken into account in working out the capital gain or capital loss when any CGT event happens to the client list. Therefore, paragraph 40-880(5)(f) of the ITAA 1997 will prevent the partnership from deducting the expenditure for the client list under subsection 40-880(2) of the ITAA 1997.