Private ruling: Deductions - expenditure
Date of advice: 7 October 2025
Published: 24 November 2025
Ruling period: Year ended 1 July 20XX to 30 June 202XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Whether Company X can deduct the Amount under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: Company X incorporated in Australia in 20XX and is a subsidiary member of a tax consolidated group. Company X was established to commence a business. In 20XX, Company X and Company Y (the Vendor) entered into an Agreement for Sale of Assets and Business (the Sale Agreement). Under the Sale Agreement, Company X agreed to buy the legal and beneficial interest in the Business and the Assets from the Vendor free from Encumbrances, on the terms and conditions of that document. Under the Sale Agreement, the Purchae Price for the Assets and the Business was the deposit plus the Completion Payment. On Completion, Company X paid the Amount to the Vendor to reimburse the Vendor for amounts the Vendor incurred. The Vendor gave Company X notice in writing of the Amount payable and how that Amount was calculated. On XX July 20XX, completion of the Sale Agreement occurred and Company X paid the Vendor the Completion Payment, and the Amount.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-880 | Income Tax Assessment Act 1997 subsection 40-880(1) | Income Tax Assessment Act 1997 subsection 40-880(2) | Income Tax Assessment Act 1997 paragraph 40-880(2)(c) | Income Tax Assessment Act 1997 subsection 40-880(3) | Income Tax Assessment Act 1997 subsection 40-880(4) | Income Tax Assessment Act 1997 subsection 40-880(5) | Income Tax Assessment Act 1997 paragraph 40-880(5)(f) | Income Tax Assessment Act 1997 subsection 40-880(6) | Income Tax Assessment Act 1997 subsection 40-880(7) | Income Tax Assessment Act 1997 subsection 40-880(8) | Income Tax Assessment Act 1997 subsection 40-880(9) | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 subsection 108-5(2) | Income Tax Assessment Act 1997 subsection 110-25(2)

Reasons for decision: Summary: Company X is not entitled to claim a deduction for the Amount pursuant to section 40-880 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 40-880 of the ITAA 1997 provides a deduction for business capital expenditure. It is a provision of last resort such that a deduction is not available under section 40-880 of the ITAA 1997, if the expenditure is otherwise available under some other provision. The object of subsection 40-880(1) of the ITAA 1997 is to make certain business capital expenditure deductible over 5 years, or immediately in the case of some start-up expenses for small businesses, if: a. the expenditure is not otherwise taken into account; and b. the deduction is not denied by some other provision; and c. the business is, was or is proposed to be carried on for a taxable purpose. Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues sets out the Commissioner's views on the interpretation of the operation and scope of section 40-880 of the ITAA 1997. Paragraph 23 of TR 2011/6 states that determining the amount allowable as a deduction under section 40-880 of the ITAA 1997is a multi-step process: • first it is necessary to determine initial entitlement under subsection 40-880(2); and • then the limitations and exceptions in the subsequent subsections must be considered. Under subsection 40-880(2): 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: (a) in relation to your *business; or (b) in relation to a business that used to be carried on; or (c) in relation to a business proposed to be carried on; or (d) to liquidate or deregister a company of which you were a *member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business. | Detailed Reasoning - The expenditure must be capital in nature: The expression 'capital expenditure' is not a defined term for the purposes of section 40-880 of the ITAA 1997. Whether expenditure is revenue or capital in nature is a question of fact and degree that depends on the particular circumstances of the case, having regard to the principles established by the case law (paragraph 64 of TR 2011/6). The High Court decision in Sun Newspapers Ltd v Federal Commissioner of Taxation (1936) 61 CLR 337; (1938) 5 ATD 23; (1983) 1 AITR 403 (Sun Newspaper ) is the leading authority on the distinction between revenue and capital expenditure. In Sun Newspapers Case , Dixon J said at 363: There are, I think three matters to be considered.(a)the character of the advantage sought, and in this its lasting quality may play a part. (b) the manner in which it is to be used, relied upon and enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment as to secure future use or enjoyment. The Amount is capital in nature, as it was a one-off payment that resulted in an advantage for Company X, allowing them to obtain the Business and Assets purchased under the Sale Agreement unencumbered. | Detailed Reasoning - In relation to your business: Subject to the limitations and exceptions contained in subsections 40-880(3) to (9) of the ITAA 1997, subsection 40-880(2) provides that you can deduct capital expenditure if it is incurred in 'relation to' your 'business' or 'business proposed to be carried on'. According to TR 2011/6, the term 'in relation to' denotes proximity between the expenditure and the business, as guided in the following paragraphs: 70. The expression 'in relation to' denotes the proximity required between the expenditure on the one hand and the former, current or proposed business on the other... 72. The use of the expression 'in relation to' in subsection 40-880(2) rather than 'in carrying on' or the preposition 'on' to qualify the closeness of the required connection indicates that Parliament intended there to be greater latitude in the connection that needs to exist. However, the expenditure must still be sufficiently relevant to the business to impress on it the character of a business expense of that business. That is, the expenditure must be a genuine business expense of a particular business. In determining whether there is a genuine business expense, paragraph 79 of TR 2011/6 states that: Whether the capital expenditure is truly business expenditure is determined by the facts. Determining whether the expenditure has the character of a business expense can be approached by asking what the expenditure is for, in the sense of identifying the need or object that the expenditure serves. If the facts show that the expenditure satisfies the ends of the relevant business, it will have the character of a business expense. When Company X entered into the agreement to purchase the Assets and Business, payment of the Amount was included in the Sale Agreement. Company X's intention was to commence a business. Therefore, Company X incurred the Amount in relation to a business it proposed to carry on. This satisfies the requirement under paragraph 40-880(2)(c) of the ITAA 1997, which allows a deduction for capital expenditure incurred in relation to a business that is proposed to be carried on for a taxable purpose. | Detailed Reasoning - Limitations and exceptions on the amount of expenditure allowable as a deduction: Subsections 40-880(3) and (4) of the ITAA 1997both contain a 'taxable purpose' test which applies to the expenditure identified in subsection 40-880(2). Subsections 40-880(3) and (4) may apply to limit the deductibility of capital expenditure under subsection 40-880(2) to the extent that it relates to that business being carried on for a taxable purpose. | Detailed Reasoning - Taxable Purpose: Subsection 40-880(3) of the ITAA 1997 states: (3) You can only deduct the expenditure, for a *business that you carry on, used to carry on or propose to carry on, to the extent that the business is carried on for a *taxable purpose. As mentioned above, Company X intended to carry on the business for the purpose of gaining assessable income. Therefore, it is considered that Company X business was carried on for a taxable purpose, as required by subsection 40-880(3) of the ITAA 1997. | Detailed Reasoning - Subsection 40-880(4): Subsection 40-880(4) of the ITAA 1997 is not applicable to the present case as it relates to the deductibility of capital expenditure for a business that another entity used to carry on or proposes to carry on. | Detailed Reasoning - Exceptions to allowing a deduction: Once entitlement is initially established under subsection 40-880(2) of the ITAA 1997and the limitations in subsections 40-880(3) or 40-880(4) are considered, further restrictions may be placed on the amount of expenditure which is potentially deductible under subsection 40-880(2). These further restrictions contained in subsections 40-880(5) to 40-880(9). | Detailed Reasoning - Subsection 40-880(5): Subsection 40-880(5) of the ITAA 1997 sets out the exceptions to deductibility under section 40-880. Under this subsection you cannot deduct anything under section 40-880 for an amount of expenditure you incur to the extent one of the circumstances from paragraphs 40-880(5)(a) to (j) apply. In Company X's case, paragraphs 40-880(5)(a) to (e) and (g) to (j) of the ITAA 1997 do not apply. The expenditure could be taken into account in working out the amount of a capital gain or capital loss from a CGT event - paragraph 40-880(5)(f) of the ITAA 1997 Paragraph 40-880(5)(f) of the ITAA 1997 provides that the taxpayer cannot deduct anything under section 40-880 for an amount of expenditure they incur to the extent that it could be taken into account in working out the amount of a capital gain or capital loss from a CGT event. Division 110 of the ITAA 1997 tells you how to work out the cost base and reduced cost base of a CGT asset. You need to know these to work out if you make a capital gain or loss from most CGT events. Specifically, subsection 110-25(2) of the ITAA 1997 provides that the first element of the cost base of a CGT asset is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). In this case, it is considered that the Assets, as defined in the Sale Agreement are capable of being CGT assets (subsection 108-5(1) of the ITAA 1997) because they are a kind of property; or a legal or equitable right that is not property. Further, it is considered that the acquired Assets could be disposed of by transferring them to another party which would be a CGT event A1 (section 104-10 of the ITAA 1997). As a result, this directs us to consider whether the Amount, or only the Purchase Price, was money paid or required to be paid in respect of acquiring the Assets and could be taken into account in working out the amount of a capital gain or capital loss from a CGT event under paragraph 40-880(5)(f) of the ITAA 1997 . The Amount, together with the Purchase Price, formed part of the money paid to the Vendor by Company X under an unconditional contractual obligation (the Sale Agreement) which Company X had to perform in order to secure the Assets and Business from the Vendor. As Company X was only entitled to a transfer of the Assets and Business upon paying the Purchase Price and the Amount, they both fall within the definition of money they were required to pay in respect of acquiring the Assets and Business. This issue was considered in Satterley Property Group Pty Ltd v Federal Commissioner of Taxation [2024] ATC 20-905 (Satterley case) where the Federal Court held that top-up payments were on capital account and not deductible under section 40-880 of the ITAA 1997 as they were held to form part of the consideration paid for the acquisition of shares and the exception in subsection 40-880(6) did not apply to cancel the exception in paragraph 40-880(5)(f). At paragraph 87 of the Judgement in the Satterley case, Besanko J states: ... The Commissioner also points to the fact that all s 40-880(5)(f) requires is that the expenditure incurred could be taken into account in working out the amount of a capital gain or a capital loss from a CGT event (emphasis added). Further, at paragraphs 133 - 135 of the Judgement in the Satterley case, Besanko J states: 133. These subsections direct attention to s 110-25(2)(a) and the question whether the Top-Up Payments, or only the Purchase Price, was money paid or required to be paid in respect of acquiring the shares. 134. SPG repeats its argument in relation to the first issue, that is to say, that the Top-Up Payments are not part of the consideration paid for the shares. SPG refers to the SSA and the IM. For the reasons I gave in relation to the first issue, I reject this argument. In my opinion, the Top-Up Payments were a part of the monies SPG was required to pay in respect of acquiring the shares. 135. For the reasons I have given, the SSA provided that the Top-Up Payments were, together with the Market Value which was termed the Purchase Price, formed part of the consideration for the money paid by SPG for the shares. The Commissioner submitted that, notwithstanding the defined terms in the SSA and the separation of Market Value and it being defined as the Purchase Price, the Top-Up Payments were an unconditional contractual obligation which SPG had to perform in order to secure the shares from each of the Participating Shareholders. They fall within the definition of money required to pay in respect of acquiring the shares. The phrase 'in respect of' has the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer ( Trustees Executors & Agency Co Ltd v. Reilly [1941] VLR 110 at 111; [1941] Argus LR 105; see also Commissioner of State Taxation (WA) v. Kitchener Mining NL (1994) 29 ATR 530;94 ATC 4987). The meaning to be ascribed to the phrase 'in respect of' in any statute 'depends very much on the context in which it is found' ( State Government Insurance Office (Qld) v. Rees (1979) 144 CLR 549 at 561 per Mason J). In Technical Products Pty Ltd v . State Government Insurance Office (Qld) (1989) 167 CLR 45 at 47 Brennan, Deane and Gaudron JJ said: The words 'in respect of' have a very wide meaning. Indeed, they have a chameleon-like quality in that they commonly reflect the context in which they appear. The expression 'in respect of' in subsection 110-25(2) of the ITAA 1997 allows everything paid or given, or that is under an obligation to pay or give, for the acquisition of an asset to be included in the first element of the cost base of the asset. Paragraphs 101 and 102 of Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts , states that money or property are regarded as paid or given in respect of the acquisition of an asset if there is some 'direct and substantial link' between the money or property and the acquisition of the asset. The question whether a connection or link exists is a question of fact and degree. It is considered that the Amount paid by Company X to the Vendor and is an integral part of the purchase of the Assets and Business under the Sale Agreement, which leads to the acquisition of the Assets and Business by Company X pursuant to the terms of the Sale Agreement being satisfied. Company X was contractually obliged under the Sale Agreement to pay the Vendor the Amount which has a 'direct and substantial link' between the money paid and the acquisition of the Assets. Further, TR 2011/6 at paragraphs 258 to 260 states: 258. In most cases, capital proceeds and cost base (or reduced cost base) are taken into account in working out the amount of a capital gain or capital loss from a CGT event. Therefore, capital expenditure which reduces capital proceeds from a CGT event or forms part of the cost base (or reduced cost base) of a CGT asset could be taken into account in working out the amount of a capital gain or capital loss from a CGT event for the purposes of paragraph 40-880(5)(f). 259. Where the expenditure is not reflected in the net capital gain included in the taxpayer's assessable income for the income year in which the CGT event happened because, for example, the amendment period under section 170 of the ITAA 1936 has expired without the expenditure actually having been taken into account this does not mean that the expenditure could not be taken into account. The words of paragraph 40-880(5)(f) do not require that the capital expenditure be actually taken into account in working out a capital gain or capital loss, or that the capital gain or capital loss worked out be actually taken into account in working out the net capital gain included in the taxpayer's assessable income - that is a separate process. If the words were interpreted otherwise expenditure which should receive CGT treatment could inappropriately become a revenue deduction. 260. Therefore, whether capital expenditure could be taken into account in working out the amount of a capital gain or capital loss from a CGT event for the purposes of paragraph 40-880(5)(f) does not depend on the ability of the taxpayer to amend the net capital gain for the income year in which the CGT event happened. Company X acquired the Business and the Assets under the Sale Agreement from the Vendor free from Encumbrances for consideration. This consideration under the terms in the Sale Agreement included the Amount. In accordance with subsection 110-25(2) of the ITAA 1997, the Amount forms part of the cost base of the assets purchased under the Sale Agreement, as it is required to be paid under the terms of the contract. It served a necessary function in enabling Company X to purchase the Assets unencumbered, so that it could carry out its business operations. As such, it could be taken into account in calculating a capital gain or loss upon a future CGT event involving the Assets acquired by Company X under the Sale Agreement. Accordingly, paragraph 40-880(5)(f) of ITAA 1997 excludes the Amount from deductibility under section 40-880. | Detailed Reasoning - Subsection 40-880(6): Subsection 40-880(6) of the ITAA 1997 does not apply to limit the exception in paragraph 40-880(5)(f) because the Amount was not incurred to preserve the value of goodwill, nor was it incurred in relation to a legal or equitable right. | Detailed Reasoning - Conclusion: The limitation in paragraph 40-880(5)(f) of the ITAA 1997 excludes the Amount from deductibility under section 40-880 as it forms part of the cost base of the Assets purchased under the Sale Agreement.