Private ruling: Business deductions
Date of advice: 23 September 2015
Published: September 2015
Ruling period: 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018

Ruling: Questions and answers | 1. Is the expenditure incurred, in relation to the initial clearing of the Stage 1 for the enterprise activities of the Company, an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | No. | 2. Is the expenditure incurred in relation to the clearing of Stage 2, after the enterprise has commenced on Stage 1, an allowable deduction under section 8-1 ITAA 1997? | No. | 3. If the answer to question 1 is No, is the expenditure incurred in relation to the initial clearing of the Stage 1 an eligible project cost under section 40-840(2)(d) ITAA 1997? | No. | 4. If the answer to question 2 is No, is the expenditure incurred in relation to the subsequent clearing of Stage 2 an eligible project cost under section 40-840(2)(d) ITAA 1997? | No. | 5. If the answers to questions 1 and 3 are No, does the expenditure incurred in relation to the initial clearing of Stage 1 form part of the Company's cost base of the lease under section 110-25 ITAA 1997? | Yes. | 6. If the answers to questions 2 and 4 are No, does the expenditure incurred in relation to the clearing of Stage 2 form part of the Company's cost base of the lease under section 110-25 ITAA 1997? | Yes. | 7. Do the plants satisfy the definition of 'horticultural plant' as defined in section 40-520(2) ITAA 1997? | Yes | 8. If the answer to question 7 is Yes, can the decline in value of the horticultural plants be claimed as a deduction in accordance with sections 40-545(1) and 40-545(2) ITAA 1997? | Yes. | 9. If the answer to question 8 is Yes, do the establishment costs incurred on the horticultural plants for acquiring and planting the plants/seeds, preparing to plant, top soil enhancement, soil analysis, ploughing, contouring, fertilising and stone removal form part of the cost base of the horticultural plants under section 40-545(1) ITAA 1997? | Yes. (except for stone removal) | 10. If the answer to question 7 is No, is an immediate deduction available under section 8-1 ITAA 1997 for the costs incurred for acquiring and planting the plants/seeds, preparing to plant, top soil enhancement, soil analysis, ploughing, contouring, fertilising and stone removal? | Not applicable. | 11. Are the legal fees incurred in relation to the preparation and lodgment of the Expression of Interest document, negotiations and preparation of contracts as preferred proponent for the securing of the leasehold interest from entity X, eligible costs within the scope of section 40-880 ITAA 1997. | No. | 12. If the answer to question 11 is No, do the legal fees form part of the Company's cost base of the interest held under section 110-25 ITAA 1997? | Yes. | 13. Prior to the successful application and execution of the lease, are the costs incurred in relation to feasibility and environmental assessments fees eligible project costs under section 40-840(2)(d) ITAA 1997? | Yes. | 14. If the answer to question 13 is No, are the costs deductible over 5 years as business capital expenditure under section 40-880 ITAA 1997? | Not applicable. | 15. If the answers to questions 13 and 14 are No, do the costs incurred form part of the taxpayer's cost base of the interest held under section 110-25 ITAA 1997? | Not applicable. | 16. Prior to the successful application and execution of the lease, are the following expenses deductible under section 8-1 ITAA 1997? | • fees paid to the registered lobbyist | • travel and accommodation costs incurred by employees and directors for travel between the Company's head office in area 1, parent head office in area 2 and the enterprise | • rent and outgoings incurred in relation to the Company's head office in area 1 | • salaries paid to directors and employees | Yes. | 17. If the answer to question 16 is No, are the previous identified costs in question 16 deductible over 5 years as business capital expenditure under section 40-880 ITAA 1997? | Not applicable. | 18. If the answers to questions 16 and 17 are No, do the previous identified costs in Question 15 form part of the taxpayer's cost base of the interest held under section 110-25 ITAA 1997? | • fees paid to the registered lobbyist | • travel and accommodation costs incurred by employees and directors for travel between the Company's head office in area 1, parent head office in area 2 and the enterprise | • rent and outgoings incurred in relation to the Company's head office in area 1 | • salaries paid to directors and employees | Not applicable. | 19. Are the following expenses incurred, after securing the leasehold interest, deductible under section 8-1 ITAA 1997 as an ongoing business related expense? | • fees paid to the registered lobbyist | • travel and accommodation costs incurred by employees and directors for travel between the Company's head office in area 1, parent head office in area 2 and the enterprise | • rent and outgoings incurred in relation to the Company's head office in area 1 | • salaries paid to directors and employees | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. Prior to the incorporation of the Company, the Company's ultimate parent company incorporated a company called the incorporated company 2. The incorporated company was incorporated for the purpose of incurring costs for the initial feasibility and analysis regarding the commercial viability of the enterprise in response to a tender for the operations out by Entity X. 3. This is usual practice for the group to setup a stand-alone company to investigate business opportunities and where a decision to proceed is made, a new entity is then incorporated to enter into the contracts and operate the business. 4. The financial statements for the incorporated company show that considerable expenditure was incurred, and subsequently on charged to the Company, in relation to the feasibility work. No deduction has been claimed by the Company for these costs. 5. The majority of these costs relate to: a. Legal advice regarding the due diligence, tender process and proposals b. Consultants c. Rent of office premises d. Travelling costs between area 1, area 2 and the enterprise e. Salary and superannuation for employees 6. The unaudited financial statements for the Company show the cross charge of the incorporated company's costs incurred, as well as provide evidence of further business related costs incurred by the Company over the period. These costs included: a. Further legal and consultant fees b. Travelling costs c. Office rent d. Salary and superannuation e. Other traditional business related costs including insurance, office depreciation, telephone, computer and accounting costs 7. By the time that access was granted and the enterprise began, the Company had already incurred substantial expenditure in both pre-commencement costs and post-commencement costs related to the enterprise. 8. The Company had also already purchased equipment to conduct its activities. 9. The Company was incorporated under the incorporated company and the name was changed. 10. The Company is a private company and Australian resident for income tax purposes. 11. The Company was incorporated for the purposes of negotiating with Entity X for the securing of a leasehold interest with a view to develop the enterprise. 12. Subject to a further feasibility review, the Company also intends to use the by-products of the enterprise to produce alternative products. 13. The Company has a complete business plan for the activities covering the initial feasibility review, business strategy and viability, financing of initial capital and ongoing works and business life cycle from execution of material contracts, securing of plant and equipment, operation of the enterprise, supply chain management for distribution of products, value-adding secondary processing from commencement of the lease to production. 14. The Company has secured leasehold interest in two separate assets which they propose to develop, they are; • Stage 1 • Stage 2 15. The Company has incurred, and continues to incur, costs for development of Stage 1 and Stage 2. This includes feasibility studies and environmental assessments as part of its due diligence review prior to execution of contracts with Entity X. 16. The Company has secured a number of leases with the Entity X, with varying lease terms between 10 and 50 years. Some of the leases have an option for extension, subject to the Company satisfying certain conditions. 17. To assist with the promotion of the Company's proposal and negotiations with Entity X, the Company has contracted the services of a registered lobbyist and is incurring ongoing costs under this contract. The Company also engaged the services of a legal firm to act on its behalf in negotiating contractual terms of the leases. 18. The Company has leasehold business premises in area 1 where administration staff and Directors are located in the course of their employment duties. 19. Further land leases are still subject to negotiation and environmental approval. 20. The Company has employed various key staff. 21. To date, the Company has started to develop Stage 1. There are costs relating to the clearing. 22. Further costs will be incurred as Stage 2 is developed. 23. The Company expects to incur costs in relation to soil preparation and the initial planting. 24. The taxpayer has incurred costs in relation to the water supply for the enterprise. 25. As part of the ongoing business operations, the Company will continue to incur costs such as: • Salaries and wages (and on-costs such as superannuation and pay-roll tax) for directors, management and administration staff • Rent of premises • Travel and accommodation for employees travelling between offices 26. The planting will be staggered between stage 1 and stage 2.

Relevant legislative provisions: Income Tax Assessment Act 1997 S ection 8-1 | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 subparagraph 40-515(1)(b) | Income Tax Assessment Act 1997 subsection 40-520(2) | Income Tax Assessment Act 1997 subsection 40-525(2) | Income Tax Assessment Act 1997 Section 40-530 | Income Tax Assessment Act 1997 subsection 40-530(2) | Income Tax Assessment Act 1997 subsection 40-545(1) | Income Tax Assessment Act 1997 subsection 40-545(2) | Income Tax Assessment Act 1997 subsection 40-840(2) | Income Tax Assessment Act 1997 subparagraph 40-840(2)(a) | Income Tax Assessment Act 1997 subparagraph 40-840(2)(b) | Income Tax Assessment Act 1997 subparagraph 40-840(2)(c) | Income Tax Assessment Act 1997 subparagraph 40-840(2)(d) | Income Tax Assessment Act 1997 subparagraph 40-840(2)(d)(ii) | Income Tax Assessment Act 1997 subparagraph 40-840(2)(d)(iii) | Income Tax Assessment Act 1997 subparagraph 40-840(2)(d)(iv) | Income Tax Assessment Act 1997 Section 40-880 | Income Tax Assessment Act 1997 subsection 40-880(5) | Income Tax Assessment Act 1997 subparagraph 40-880(5)(d) | Income Tax Assessment Act 1997 subparagraph 40-880(5)(f) | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 subsection 110-25(5) | Income Tax Assessment Act 1997 Section 110-35

Reasons for decision: Summary: When did your business activity commence? In determining when a business commences there are three indicators that must be present before it can be said that a business has commenced. • purpose, intention and decision • acquisition of a business structure, and • commencement of business operations Activities preliminary to the commencement of an actual business of primary production, such as merely preparing land for primary production, do not amount to engaging in primary production ( Southern Estates Pty Ltd v. FC of T [1966-1967] 117 CLR 481 ). However it may still be possible to find that the preliminary activities have such a commercial character as to themselves amount to trading operations ( Ferguson v. Federal Commissioner of Taxation 79 ATC 4261 at 4264-4265; (1979) 9 ATR 873). In such cases, Fisher J said that it is necessary to give consideration to the essential nature of the activity, and the question of whether it has the characteristics of a business. In Esso Australia Resources Pty Ltd v Commissioner of Taxation [2011] FCA 360 , the Judges stated that a taxpayer needed to be committed to commercial exploitation for there to be sufficient nexus between expenditures claimed for deduction and the prospect of income being earned in the future in the taxpayer's business. In cases where it is necessary to distinguish between the activity constituting the carrying on of a business and an activity that is preliminary to the carrying on of a business, it is the element of commitment to the relevant income-producing activity that establishes the requisite connection between the expenditure and the business carried on for income-producing purposes. There are a number of cases which have examined the question of when a business of primary production commenced. However these cases generally involved activities that were initially of a non-commercial nature, but subsequently evolved into a more business-like activity with a commercial character. By contrast, in the Company's case the ATO has accepted that the enterprise as described in the Company's Business Plan constitutes the carrying on of a business. The Company was definitively committed to the activity when the Company was incorporated. Whilst the activity was still in its initial phases, the Company had established a genuine purpose of profit-making from the activity. In Ferguson , Bowen CJ and Franki J noted that; every business has to begin, and even isolated activities may in the circumstances to held to be the commencement of carrying on business. The Company's incorporation for the purpose of negotiation with Entity X to secure leasehold interest, with the intention to derive assessable income from the enterprise was entirely commercially driven. Accordingly it is considered that the business commenced when the Company was incorporated on xx xx xx. Question 1 and 2 Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income. However, subsection 8-1(2) of the ITAA 1997 states that you cannot deduct a loss or outgoing under this section to the extent it is a loss or outgoing of capital or of a capital nature. It has been established that you commenced the business of primary production on mid-November 20XX, to determine whether a deduction may be claimed for the expenses incurred we must consider not only whether you are in business but also the nature of the expense. In Sun Newspaper Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337(Sun Newspaper) it was considered that expenditure in establishing, replacing or enlarging the profit-yielding structure itself is capital and is to be contrasted with working or operating expenses. The test laid down in Sun Newspaper involved three elements: a) the nature of the advantage sought b) the way it is to be used or enjoyed, and c) the means adopted to get it. Where the expense results in bringing into existence an asset or an advantage for the enduring benefit of the business, the expenditure is likely to be capital in nature. Similarly, where the expense is a single payment for the future use or enjoyment of the asset, the expenditure is likely to be capital. The benefit from the expenses associated with the clearing of the land is considered to be capital in nature as it will result in an enduring advantage, extending beyond the year in which it will be incurred. The resultant advantage will be the additional land which will become available to be used for primary production purposes. Application to the circumstances The clearing of the enterprise for developing is considered to be an establishment cost of the business and capital in nature, accordingly, no deduction will be allowable under section 8-1 of the ITAA 1997 for the clearing at stage 1. The clearing of stage 2 is to expand the operation and is also considered to be an establishment cost; consequently, no deduction will be allowable under section 8-1 of the ITAA 1997 for the clearing of stage 2. Question 3 and 4 Under subsection 40-840(2) of the ITAA 1997 capital expenditure you incur can be a project amount so far as: (a) it does not form part of the cost of a depreciating asset you hold or held; and (b) you cannot deduct it under a provision of this Act outside this Subdivision; and (c) it is directly connected with a project you carry on or propose to carry on for a taxable purpose; and (d) it is one of these: I. an amount paid to create or upgrade community infrastructure for a community associated with the project; or II. an amount incurred for site preparation costs for depreciating assets (except, for horticultural plants, in draining swamp or low-lying land or in clearing land); or III. an amount incurred for feasibility studies for the project; or IV. an amount incurred for environmental assessments for the project; or V. an amount incurred to obtain information associated with the project; or VI. an amount incurred in seeking to obtain a right to intellectual property; or VII. an amount incurred for ornamental trees or shrubs. To be a 'project amount' within subsection 40-840(2) of the ITAA 1997, the amount must be capital expenditure which, in addition to satisfying paragraphs 40-840(2)(a) to 40-840(2)(c) of the ITAA 1997, is one of the amounts specified in paragraph 40-840(2)(d) of the ITAA 1997. As set out in ATO Interpretative Decision ATO ID 2015/12; In order for the capital expenditure to be a project amount within subparagraph 40-840(2)(d)(ii) of the ITAA 1997, the amount must be incurred for site preparation costs for depreciating assets (except for horticultural plants, in draining swamp or low-lying land or in clearing land). The word 'preparation' is not defined for the purposes of Subdivision 40-I of the ITAA 1997 and therefore, will take its ordinary meaning shaped by the context in which it is found. The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne, relevantly defines the word 'preparation' as: n. The action or process of preparing or being prepared for use or consideration Similarly, the word 'prepare' is defined as: 1. Make (something) ready for use or consideration. Based on the ordinary meaning, the phrase 'site preparation' for the purposes of Subdivision 40-I of the ITAA 1997 includes doing things to make the site ready for its intended use. Therefore, capital expenditure incurred by a taxpayer to prepare a site for the construction of a depreciating asset may constitute site preparation costs for depreciating assets in accordance with subparagraph 40-840(2)(d)(ii) of the ITAA 1997 provided it is not for horticultural plants, in draining swamp or low-lying land or in clearing land. …'Clearing land' is not defined for the purposes of Subdivision 40-I of the ITAA 1997 and therefore, the words will take their ordinary meaning shaped by the context in which they are found. The Macquarie Dictionary Online defines 'clearing' as, inter alia: 35. To remove trees, undergrowth, etc., from (an area of land). Application to the circumstances The expenses incurred by the Company to clear stage 1 and stage 2 are not eligible project costs under section 40-840(2)(d) of the ITAA 1997 as they are specifically excluded under subparagraph 40-840(2)(d)(ii) of the ITAA 1997. The remaining subparagraphs under subsection 40-840(2)(d) of the ITAA 1997 do not apply to the clearing of the land. Question 5 and 6 The capital gains tax (CGT) consequence of a lessee incurring expenditure of a capital nature on making improvements to leased property depends on whether the lessee or the lessor is the owner of the improvements. Taxation Determination TD 98/23 explains that; 4. If the lessee does not own (and has never owned) the improvements, but the capital expenditure is incurred by the lessee to increase the value of the lease and is reflected in the state or nature of the lease at the time of a CGT event happening to it, subsection 110-25(5) allows for the expenditure incurred to be included in the cost base of the lease to the lessee. If any part of the lessee's expenditure is recouped, and the amount of the recoupment received is not included in the lessee's assessable income, subsection 110-25(8) precludes the amount from forming part of the cost base of the lease. Under section 110-25 of the ITAA 1997 it states the cost base of a CGT asset consists of 5 elements; for present purposes the relevant element is the fourth element under subsection 110-25(5) of the ITAA. The fourth element is capital expenditure you incurred: (a) the purpose or the expected effect of which is to increase or preserve the asset's value; or (b) that relates to installing or moving the asset. For expenditure to be included in the fourth element of the cost base of a CGT asset under subsection 110-25(5) of the ITAA 1997, it must be incurred with the purpose or the expected effect 'to' increase or preserve the asset's value. It is immaterial whether or not the expenditure in fact increases or preserves the asset's value. Application to the circumstances The Company has leased an asset from Entity X, any improvements the Company makes to the leased asset, i.e. clearing, is not owned by the Company. However, it is reasonable to expect that the clearing of stage 1 and stage 2, to ready it for development, may increase the value of the asset as per subparagraph of 110-25(5)(a) of the ITAA 1997. Accordingly, the Company is able to include the costs incurred under the fourth element of the cost base, in subsection 110-25(5) of the ITAA 1997, of the lease. Question 7, 8 and 9 Under subparagraph 40-515(1)(b) of the ITAA 1997 you can deduct an amount equal to the decline in value for an income year of a depreciating asset that is a horticultural plant. Under subsection 40-520(2) of the ITAA 1997 a horticultural plant is a live plant or fungus that is cultivated or propagated for any of its products or parts. Under subsection 40-525(2) there are rules in relation to the deductibility of capital expenditure for horticultural plants; to be eligible to deduct capital expenditure one of the following conditions must be satisfied; | Detailed Reasoning - Condition: 1 You own the horticultural plant and any holder of a lease, lesser interest or licence relating to the land does not carry on a business of horticulture on the land ........... 2 The horticultural plant is attached to land you hold under a lease, or a quasi-ownership right granted by an exempt Australian government agency or an exempt foreign government agency, and: (a) the lease or quasi-ownership right enables you to carry on a business of horticulture on the land; and (b) any holder of a lesser interest or licence relating to the land does not carry on a business of horticulture on the land. ........... 3 You: (a) hold a licence relating to the land to which the horticultural plant is attached; and (b) carry on a business of horticulture on the land as a result of holding the licence. Section 40-530 of the ITAA 1997 determines when the decline in value starts. Subsection 40-530(2) states a horticultural plant starts to decline in value in: (a) if you are the first entity to satisfy a condition in subsection 40-525(2) for the plant - the income year in which the first commercial season starts; or (b) if not - the later of the income year in which you first satisfied that condition and the income year in which the first commercial season starts. Under subsection 40-545(1) of the ITAA 1997 the decline in value of a horticultural plant for the income year in which it starts to decline in value is all of the capital expenditure attributable to the establishment of the plant if its effective life is less than 3 years. Under subsection 40-545(2) of the ITAA 1997 you work out the decline in value for an income year of a horticultural plant whose effective life is 3 years or more in this way: Establishment expenditure × Write-off days in income year 365 × Write-off rate where: establishment expenditure is the amount of capital expenditure incurred that is attributable to the establishment of the * horticultural plant. write-off days in income year is the number of days in the income year on which you satisfied a condition in subsection 40-525(2) for the plant and either used it for * commercial horticulture or held it ready for that use. write-off rate is the rate shown in this table for the * horticultural plant according to its * effective life. | Detailed Reasoning - The write-off rate is:: 1 3 to fewer than 5 years 40% ........... 2 5 to fewer than 62/3 years 27% ........... 3 62/3 to fewer than 10 years 20% ........... 4 10 to fewer than 13 years 17% ........... 5 13 to fewer than 30 years 13% ........... 6 30 years or more 7% Taxation Determination TD 2006/46 at paragraph 3 states; 3. Establishment expenditure includes: • the cost of purchasing plants or seeds; • any costs incurred in preparing to plant; • the cost of planting the plants or seeds; • the costs of pots and potting mixtures (for potted plants); • the costs incurred in grafting trees; and • the cost of establishing plants used for associated purposes, such as for companion planting (if those plants are not horticultural plants in their own right). Costs incurred in preparing to plant include the part of the cost of ploughing, top dressing, fertilising, top soil enhancement, soil analysis tests, forming up planting rows and planting site surveys that are attributable to the establishment of a horticultural plant. Application to the circumstances The plants the Company intends to plant are considered to meet the definition of horticultural plant under subsection 40-520(2) of the ITAA 1997. As the asset in which the plants will be sown is held under a lease, the Company will meet the condition in item 2 of subsection 40-525(2) of the ITAA 1997 and a deduction for horticultural plants is available to the Company under paragraph 40-515(1)(b) of the ITAA 1997 for the decline in value. Accordingly; the deduction for the plants is determined using the formula in section subsections 40-545(1) and 40-545(2) of the ITAA 1997 and is based on the capital expenditure incurred by the Company that is attributable to their establishment. The deduction is allowable when the plants enter their first commercial season as set out by section 40-530, item 2 of the ITAA 1997. The establishment costs the Company incurred for acquiring and planting the plant/seeds, preparing to plant top soil enhancement, soil analysis, ploughing, contouring, and fertilising form part of the cost base of the horticultural plants under section 40-545(1) of the ITAA 1997. However, costs incurred for stone removal do not form part of the cost base of the horticultural plants. These costs form part of the establishment cost of the enterprise and the Company is able to include these costs under the fourth element of the cost base in subsection 110-25(5) of the ITAA 1997 of the lease. Question 11 Section 40-880 of the ITAA 1997 provides a deduction for certain business related capital expenditure incurred and is a provision of last resort. The capital expenditure is deductible to the extent that your business is, was, or will be carried on for a taxable purpose. Subsection 40-880(5) of the ITAA 1997 states that you cannot claim deductions under section 40-880 of the ITAA 1997 for capital expenditure to the extent that: (a) it forms part of the cost of a depreciating asset that you hold, used to hold or will hold; or (b) you can deduct an amount for it under a provision of this Act other than this section; or (c) it forms part of the cost of land; or (d) it is in relation to a lease or other legal or equitable right; or (e) it would, apart from this section, be taken into account in working out: (i) a profit that is included in your assessable income (for example, under section 6-5 or 15-15); or (ii) a loss that you can deduct (for example, under section 8-1 or 25-40); or (f) 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; or (g) a provision of this Act other than this section would expressly make the expenditure non-deductible if it were not of a capital nature; or (h) a provision of this Act other than this section expressly prevents the expenditure being taken into account as described in paragraphs (a) to (f) for a reason other than the expenditure being of a capital nature; or (i) it is expenditure of a private or domestic nature; or (j) it is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income. Application to the circumstances The Company incurred legal fees in relation to the preparation and lodgment of the Expression of interest document, negotiations and preparation of contracts as preferred proponent for the securing of the leasehold interest from Entity X. Subparagraph 40-880(5)(d) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure you incur to the extent that 'it is in relation to a lease or other legal or equitable right'. Subparagraph 40-880(5)(f) of the ITAA 1997 provides that you cannot deduct anything under section 40-880 of the ITAA 1997 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. Consequently, as the costs incurred are in relation to a leasehold interest and could be taken into account in working out the amount of a capital gain or capital loss from a CGT event, a deduction is not available to the Company under section 40-880 of the ITAA 1997. Question 12 Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base; 1. money paid, or market value of property given, to acquire the asset 2. incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset 3. certain non-capital costs of ownership 4. capital expenditure on improvements 5. capital expenditure in respect of title or right to the asset Section 110-35 of the ITAA 1997 details the incidental costs of the second element which includes; 1. remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser. 2. costs of transfer 3. stamp duty or other similar duty 4. if you; a. acquired a CGT asset - costs of advertising or marketing to find a seller, or b. if a CGT event happened - costs of advertising or marketing to find a buyer 5. costs relating to the making of any valuation or apportionment for the purposes of this part 6. search fees relating to a CGT asset 7. cost of a conveyancing kit (or a similar cost) 8. borrowing expenses (such as loan application fees and mortgage discharge fees) 9. termination or other similar fees incurred as a direct result of your ownership of a CGT asset ending. You do not include costs if you: • have claimed a tax deduction for them in any year, or • omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired. Application to the circumstances The Company incurred legal fees in relation to the preparation and lodgment of the Expression of interest document, negotiations and preparation of contracts as preferred proponent for the securing of the leasehold interest from Entity X. Accordingly, the Company is able to include the costs incurred under the second element of the cost base, in subsection 110-25(5) of the ITAA 1997, of the lease. Question 13 Under subsection 40-840(2) of the ITAA 1997 capital expenditure you incur can be a project amount so far as: (a) it does not form part of the cost of a depreciating asset you hold or held; and (b) you cannot deduct it under a provision of this Act outside this Subdivision; and (c) it is directly connected with a project you carry on or propose to carry on for a taxable purpose; and (d) it is one of these: I. an amount paid to create or upgrade community infrastructure for a community associated with the project; or II. an amount incurred for site preparation costs for depreciating assets (except, for horticultural plants, in draining swamp or low-lying land or in clearing land); or III. an amount incurred for feasibility studies for the project; or IV. an amount incurred for environmental assessments for the project; or V. an amount incurred to obtain information associated with the project; or VI. an amount incurred in seeking to obtain a right to intellectual property; or VII. an amount incurred for ornamental trees or shrubs. To be a 'project amount' within subsection 40-840(2) of the ITAA 1997, the amount must be capital expenditure which, in addition to satisfying paragraphs 40-840(2)(a) to 40-840(2)(c) of the ITAA 1997, is one of the amounts specified in paragraph 40-840(2)(d) of the ITAA 1997. To satisfy the requirement of subparagraph 40-840(2)(d)(iii) of the ITAA 1997, a feasibility study must directly address the project. Feasibility studies are carried out for the project if the studies can provide direct information on the viability of the project. An environmental assessment is the undertaking of a study, the preparing or the obtaining of a report or other documentation, or the carrying out of any other activity for the purpose of evaluating the impact or likely impact of the project on its environment and is an eligible project amount under subparagraph 40-840(2)(d)(iv) of the ITAA 1997. Application to the circumstances Prior to the successful application and execution of the lease the Company incurred costs in relation to feasibility and environmental assessments directly related to the viability and sustainability of the project. The costs incurred satisfy the paragraphs 40-840(2)(a) to 40-840(2)(c) of the ITAA 1997 and paragraphs 40-840(2)(d)(iii) and (iv) and are eligible project costs. Question 16 and 19 Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income. However, subsection 8-1(2) of the ITAA 1997 states that you cannot deduct a loss or outgoing under this section to the extent it is a loss or outgoing of capital or of a capital nature. Application to the circumstances It has been established that the Company commenced the business on xx xx xx. The Company incurred the following expenses prior to and after the successful application and execution of the lease; • Fees paid to a registered lobbyist to assist with the promotion of the Company's proposal and negotiations with Entity X. • Travel and accommodation costs for employees and directors travelling between the Company's head office in area 1, area 2 parent company and the enterprise. • Rent and outgoing for the head office in area 1. • Salary paid to directors and employees. Accordingly, as these expenses were incurred either in gaining or producing assessable income the Company is eligible for a deduction under section 8-1 of the ITAA 1997 from the time the Company was incorporated on xx xx xx.

Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on.