Private ruling: Termination payments and franchises
Date of advice: 17 January 2019
Published: May 2019
Ruling period: 1 January 2019 – 31 December 2019
Date scheme commenced: The date the Buy-Back Agreement is signed.

Ruling: Q1: Are the termination payments properly and correctly claimed as allowable deductions in the year incurred under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 97)? | A1: No. | Q2: If the answer to question 1 is ‘No’, are the amounts paid to terminate the franchise agreements deductible over five years under section 25-110 of the ITAA 97? | A2: Yes. | Q3: If the answer to question 2 is ‘Yes’, is the amount of the deduction pursuant to section 25-110 ITAA 97 equal to the termination payment as disclosed in the Buy-Back Agreement? | A3: No. | Q4: If the answer to questions 2 or 3 is ‘No’, are the termination payments deductible under section 40-880 of the ITAA 97? | A4: Yes. | Q5: If the answer to question 4 is ‘Yes’, is the amount of the deduction pursuant to section 40-880 of the ITAA 97 equal to the portion of the termination payment not otherwise deducted under section 25-110 of the ITAA 97? | A5: Yes.

Relevant facts and circumstances: The structure of the Taxpayer’s Group The Taxpayer’s Group is incorporated and has at all relevant times been the holding company of a number of wholly-owned, Australian subsidiaries (collectively the Group). The Group contains one wholly-owned, corporate store (Store X). The Taxpayer’s Group formed an income tax consolidated group for Australian income tax purposes effective 1 July 2017. The business of the Group The Group is a large retailing brand and sells to a large Australian customer base. The Group’s business has a number of different divisions that make up the broader business. One of these divisions includes a franchising division. The Group’s Franchising Division The Group has a division relating to franchised stores, and derives franchise income from these stores. A representative sample agreement, being the agreement entered between the Franchisor and a Franchisee was supplied with the Private Ruling Application. Notably, clauses 13 and 14 of the agreement relate to termination of the Agreement. Growth and expansion plans The Group’s recent financial performance has been positive. To capitalise on its recent growth, the Group is taking tangible steps to expand and grow the business. One critical step that is intended to assist with this intended growth is the proposed termination of some of its existing Franchise Agreements. It is expected that the Group may terminate between 30 – 50 of the franchise agreements. There are various financial and commercial reasons supporting the termination of some of the Franchise Agreements, as outlined below: ● Changing conditions in the franchising industry ● Portfolio Management ● Resources to open new stores ● Lack of autonomy and flexibility ● Economies of scale . The buy-back of Store X Previously, the Group terminated its franchise agreement with Store X by entering into a buy-back sale agreement (the Buy-Back Agreement) which was provided with the Private Ruling Application. Under the terms of the Buy-Back Agreement, Store X agreed to sell a disclosed list of business assets to the Group. The purchase price for the sale and purchase of the Business Assets was determined in accordance with Clause 2.2 of the Buy-Back Agreement. The purchase price for the business is hereafter referred to as the Business Asset Payment. Notwithstanding IP is a ‘Business Asset’ transferred under the Buy-Back Agreement, due to the operation of clause 4 of the Franchise Agreement, the majority, if not all, of this IP is the legal property of the Franchisor. The intention of the inclusion of the IP as a Business Asset in the Buy-Back Agreement is to ensure there is an all-encompassing clause that captures any residual IP that relates solely to that store. The value attributable to such residual IP can be assumed to be nominal. Under the Buy-Back Agreement and consistent with clause 14.3(g) of the Franchise Agreement, there is no goodwill acquired by the Group as goodwill is already and always only owned by the Franchisor pursuant to clause 4.8 of the franchise Agreement. In addition and separate to the Business Asset Payment, the Group agreed to pay a sum to the Store X Franchisee for the early termination of the Agreement. The Buy-Back Agreement states that, on termination of the Franchise Agreement, the Seller, Principals and Franchisor will be under no further obligation to each other and will have no further rights against each other under that agreement (as stated under clause 3(c) of the Buy-Back Agreement). The Buy-Back Agreement also includes a Confidentiality clause. The Buy-Back Agreement also includes Non-Compete restrictions. A copy of the Buy-Back Agreement was provided with the Private Ruling Application. The purported termination of the franchise agreements As mentioned above, the Group is purporting to terminate some of its franchise agreements. The final quantum of how many franchise agreements will be terminated is not yet known but it is expected to be approximately between 30-50 agreements. It is proposed that, similar to the Buy-Back Agreement with the Store X Franchisee, there will be a payment for the Business Assets acquired (the Business Asset Payment) and a separately calculated and disclosed termination payment to compensate the respective franchisees for the early termination of the franchise agreement (the Termination Payment). The allocation of the Business Asset Payment and the Termination Payment will be consistent with the principles of clause 14.3(c) of the Franchise Agreement in the sense that the business assets will be acquired for their written down value. The Termination Payment reflects an amount that the Group believes will be sufficient for the Franchisee to mutually agree to terminate their franchise agreement. There is no goodwill acquired and any residual IP acquired is assumed to have nominal value, as these intangible assets are already owned by the Franchisor pursuant to clause 4 of the Franchise Agreement as discussed above. On termination of the Franchise Agreement, the Seller, Principals and Franchisor will be under no further obligation to each other and will have no further rights against each other under that agreement. Therefore, all rights that were afforded to the Franchisee under the Franchisee Agreement will be terminated and will no longer be enforceable. There is a confidentiality clause and non-compete restrictions included in the buy-back agreements. Assumptions Each Franchise Agreement is drafted and agreed separately with each respective franchisee, however these Franchise Agreements contain almost identical terms, have a very similar structure, and are, in substance, the same. In the absence of sighting all of the buy-back agreements affecting each Franchisee, it is assumed the Buy-Back Agreements will contain one set of core terms and the only material difference will be the dollar amounts negotiated between the parties.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-110 | Income Tax Assessment Act 1997 subsection 25-110(1) | Income Tax Assessment Act 1997 subsection 25-110(3) | Income Tax Assessment Act 1997 subsection 25-110(4) | Income Tax Assessment Act 1997 subsection 25-110(5) | Income Tax Assessment Act 1997 subsection 25-110(6) | Income Tax Assessment Act 1997 section 40-880 | Income Tax Assessment Act 1997 subsection 40-880(2) | 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)(b) | 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)

Reasons for decision: Summary: The termination payments are not allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 . | Detailed Reasoning - Detailed reasoning: Section 8-1 allows an immediate deduction for expenses incurred in the course of carrying on a business provided that the expenses are not capital in nature. The guidelines for distinguishing between capital and revenue were laid down in Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T (1938) 61 CLR 337: (1938) 45 ALR 10; (1938) 1 AITR 403; 5 ATD 97 ( Sun Newspapers ). In Sun Newspapers , Dixon J stated: The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay. Another relevant consideration as described in Sun Newspapers by Dixon J, is assessing the character of the expenditure: There are, I think, three matters to be considered, (a ) the character of the advantage sought , and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or 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 outlay to cover its use or enjoyment for periods commensurate with the payment by making a final provision or payment so as to secure future use or enjoyment. | Detailed Reasoning - What is the Group’s business?: A franchise is an arrangement which allows the franchisee to use the intellectual property, goodwill and business system that is owned by the Franchisor. The term “franchising” covers various forms of co-operation between different corporations. The Group utilises the business system it has developed in two ways. Firstly it operates one corporate store whereby it sells products to customers, earning 100% of the gross revenue and incurring all expenditure in relation to these sales. The Group’s other method of generating income is from granting non-exclusive licenses to franchisees to use the IP, goodwill and business systems that the Group has developed. Its revenue from this part of the business is derived by receiving an upfront franchise payment and ongoing royalty payments. | Detailed Reasoning - What is the Group’s profit yielding structure?: In identifying the structure established by the group for the earning of profit, reference is made to the statements of Dixon J in Sun Newspapers [3] : The business structure or entity or organisation may assume any of an almost infinite variety of shapes. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called goodwill, that is, widespread or general reputation, habitual patronage by clients or customers and an organised method of serving their needs. The Commissioner considers that a franchise is an enterprise that is within the scope of the above statement of Dixon J, in that it comprises a low proportion of physical assets and a high proportion of intangible assets, including goodwill. Goodwill The High Court of Australia stated in Commissioner of Taxation (Cth) v. Murry [1998] HCA 42 that the attraction of custom still remains central to the legal concept of goodwill, and further that: ● For legal purposes, goodwill is the attractive force that brings in custom and adds to the value of the business. It may be site, personality, service, price or habit that obtains custom: paragraph [13]. ● The goodwill of a business is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it: paragraph [24]. ● It may be site, personality, service, price or habit that obtains custom: paragraph [67]. ● Goodwill is a quality or attribute that derives, among other things, from using or applying other assets of a business, for example, use of a trade mark or a particular site, or from selling at competitive prices: paragraph [24]. ● It is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements: paragraph [24]. ● Many of the sources of goodwill are not themselves property. Nor are they assets for accounting purposes. Examples include manufacturing and distribution techniques, the efficient use of the assets of a business, superior management practices and good industrial relations: paragraph [25]. ● Other examples are location of the business, a lack of competition resulting from an enforceable restrictive covenant, and statutory monopolies in respect of products of a business such as patents or trademarks: paragraph [26]. ● Expenditures such as advertising and promotional expenses are also sources of goodwill: paragraph [27]. The Commissioner considers that the Group’s business structure relies on the IP it has developed which is the main component that makes up the goodwill of the Group’s business. Under the Buy-Back Agreement and consistent with clause 14.3(g) of the Franchise Agreement, there is no goodwill acquired by the Group as goodwill is already and always only owned by the Franchisor pursuant to clause 4.8 of the Franchise Agreement. The Commissioner acknowledges that the Franchise Agreements result in the franchisee not owning the Goodwill of the business, however what the franchisee does acquire is a non-exclusive licence to operate a certain store and utilise the goodwill the Group has developed, provided the franchisee complies with the terms and conditions of the Franchise Agreement. Therefore whilst the Commissioner agrees that no goodwill belongs to the franchisee, the Group effectively gives up its right to operate a store in the area using the franchise system that the Group has developed when it grants a franchise. When the Group makes a payment to terminate a franchise, it is effectively cancelling the licence so that the full use of the goodwill as it relates to the particular store reverts back to the Group. | Detailed Reasoning - Operation of a Corporate Store: It is considered that the corporate store from which the Group operates itself, forms part of the Group’s Tools profit yielding structure. Granting and termination of a Franchise The grant of the non-exclusive licence to the franchisee allows the franchisee to operate its own business subject to the terms and conditions in the franchise agreement for the franchise term. The relevant clauses which support that the franchisee to operate its own business include: ● Clause 1(1.1) Personnel means any person engaged, appointed or employed by the Franchisee, including individuals, employees, agents and contractors. ● Clause 2(2.1) The Franchisor grants to the Franchisee for the term, and the Franchisee accepts the exclusive right to establish and operate the Group’s Business in the Territory from the Premises pursuant to the Group’s System and in accordance with the terms of this Agreement. ● Clause 4(4.6) The Franchisee must conduct the Group’s Business under its own name or a company name which does not include the Name and any stationary, dockets and letterhead must clearly indicate the independent legal relationship between the Franchisee and the Franchisor. The Franchisee must exhibit a conspicuous sign at its Premises (if applicable), and a notation on its business cards, stationery and any promotional material produced by the Franchisee, stating clearly that the Franchisee is a Franchisee and the independent proprietor of the Group’s Business. The above terms and conditions demonstrate that the grant of the franchise results in the Group disposing of part of its profit yielding structure by issuing the non-exclusive license to operate its business in a certain location. The Commissioner considers that by terminating a franchise the Group is agreeing to accept the surrender of the franchise (a non-exclusive licence) such that it will be able to operate the particular store itself. You argue that because the Group is not enlarging its area of operation, improving its goodwill, embarking on any new enterprise, affecting its fixed capital, or bringing into existence any asset or advantage of an enduring benefit, the termination payment is revenue in nature. You support your conclusion on the basis of the decision in Anglo Persian Oil Co v Dale (1932) 16 TC 253 (Anglo Persian case). | Detailed Reasoning - Anglo Persian Case: In the Anglo Persian case, the company had contracts with agents for the conduct of its business in remote parts of the world. The agents were remunerated by commission at specified rates. As the business developed, the company from time to time dispensed with the services of such agents, finding itself able to carry on the business more economically directly by its own servants. Lawrence J stated at 270 that: “The Company by cancelling the agency agreement, and itself undertaking the future management of its business in Persia, neither enlarged the area of its operations, nor improved its goodwill nor embarked upon a new enterprise; it merely effected a change in its business method and internal organisation, leaving its fixed capital untouched.” (emphasis added). The Commissioner considers that the Anglo Persian case should be distinguished from the Group’s circumstances on the basis that the contractual relationship between Anglo Persian and its agents was one of agency, with Anglo Persian contracting its agents to represent it in its dealings with its customers in remote areas. In doing so, Anglo Persian retained its relationship as the principal in dealings with its customers. This can be contrasted with the Group’s circumstances whereby it granted a non-exclusive right to enable a franchise to operate using the Group’s business system so as to service its own customers. Whilst the franchisee is required to operate its franchise under strict terms and conditions as outlined in the franchise agreement, this does not change the fact that the right provided by the Group requires the franchisee to operate the business as their own and on the basis that they earn all profits and bear all of the risks which are normally associated with running your own business. | Detailed Reasoning - Conclusion: The termination of the license will result in the profit yielding structure of the Group’s business expanding as it will now be able to operate the business in the franchise area that is being surrendered and provide the goods and services to the customer. Prior to termination of the franchise, the franchisee was able to use the Group’s franchise system to service its own customers. The Group’s role was to maintain and develop the franchise system to assist the franchisee to increase sales and profitability. In return for this, the Group was entitled to receive royalty payments from the franchisee. The customers of the franchise were those of the franchisee and not the Group. The Group’s contractual obligations were with the franchisee not the customers who purchase goods and services from the franchised store. The Commissioner considers that the grant of a franchise would result in the Group reducing its profit yielding structure whereas the subsequent termination would result in the expansion of its profit yielding structure. | Detailed Reasoning - Character of the advantage sought: In relation to the character of the advantage sought by the expenditure it is necessary to examine whether the expenditure secures an enduring benefit for the business. This test was outlined in British Insulated and Helsby Cables Ltd v. Atherton [1926] AC 205 at 213 - 214 by Viscount Cave where he stated: But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. As stated by Dixon J in Sun Newspapers , the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid. The nature or character of the expenditure will therefore follow the advantage that is sought to be gained by incurring the expenditure. If the advantage to be gained is of a capital nature, then the expenditure incurred in gaining the advantage will also be of a capital nature. The Commissioner has considered the commercial reality of the transactions against the requirements of the contractual terms such that neither is the sole deciding factor but a factor to be considered. As such, the Commissioner has focussed on what the Group got in return for the expenditure, in accordance with the comments of Windeyer J in BP Australia Ltd. v. Federal Commissioner of Taxation [1965] ALR 381 [8] : Regard ought therefore to be had to what it was sought to acquire and to the relation of that to the taxpayers undertaking or business. These, rather than the form of the transaction or the mechanics of the acquisition, are what appear to me to be deciding factors. In other words, it is what the particular taxpayer got for his money, rather than how he got it that is important. In considering the nature of the advantage sought, the Group stated in their application that to capitalise on its recent growth they wanted to expand and grow the business. A step towards this growth is the Group is considering the termination of between 30 – 50 franchise agreements. The ruling application then provides the Group’s commercial reasons for supporting these terminations as the following: ● challenging conditions in the franchising industry ● portfolio management ● resources open to new stores ● lack of autonomy and flexibility ● economies of scale. It appears that the nature of the advantage sought is to provide the Group with the ability to operate in locations where profits can be maximised and opportunities for growth and expansion can be harnessed. The Group recognises that its current structure lacks autonomy and is not flexible to its expansion needs, so by terminating the franchise agreements the Group achieves greater overall risk management and economies of scales. The Commissioner is of the view that the Group’s main purpose for terminating the franchised stores was so that it could maximise profits for an indefinite period of time and gain full control of the business. This could be achieved by terminating the relevant Franchise Agreements. | Detailed Reasoning - The manner in which it is to be used, relied upon or enjoyed: According to Dixon J in Sun Newspapers , when considering the manner in which the expenditure is to be enjoyed, regard must be had to the recurrent nature of the returns it produces. From the above analysis it is evident that what the Group will acquire, upon terminating the franchise agreements, will be a going concern by virtue of the fact that the franchisees no longer hold the license to operate their franchise and that now the Group can operate their stores as its own corporate stores. By terminating the franchises, the Group was successful in acquiring a business structure that would result in increased profits as compared with receiving its income by way of royalties. Therefore it can be concluded that the manner in which the expenditure was to be used and relied upon or enjoyed was by effectively acquiring a going concern that would result in regular returns in the way of sales of goods and services from the running of the particular stores. | Detailed Reasoning - The means adopted to obtain it: The final consideration as described in Sun Newspapers by Dixon J, in assessing the character of the expenditure requires analysis of the means adopted to obtain the benefit and whether this payment related to the expansion of the profit yielding structure or whether the outlay was more akin to an ordinary business expense that could be matched with regular returns. The Group contend that the facts in National Australia Bank Ltd v Federal Commissioner of Taxation (1997) 37 ATR 378 (NAB case) support that the termination payment was deductible and you state by way of analogy: a) The Termination Payment did not alter the framework within which the Group carries on its business, but rather seeks to diversify the Group’s portfolio by making the ratio of corporate to franchised stores more proportionate. b) No enduring benefit is provided to the Group as it merely enables it to exit a contract. c) The fact that the Termination Payment is a once-and-for-all payment is not conclusive that the payment is of a capital nature. The above two factors are more indicative of the character of the Termination Payment. However, in Labrilda Pty Ltd v. DFC of T 96 ATC 4303, the taxpayer paid an up-front accreditation fee for participation in the Team Pak Program conducted by the principal, Mobil Oil. Under that program Mobil granted the right to the taxpayer to carry on its service station business using the "Mobil System". The specific program was designed to provide its participants with necessary training, marketing advice, advertising, promotion and other such assistance in setting up the business. The majority in that case concluded that the taxpayer's expenses in relation to the above were of capital nature and not deductible as outgoings incurred in carrying on of the business. The expenses were more concerned with the business structure and characterised as expenditure which established the profit-yielding structure of the taxpayer's business. Therefore, the Commissioner does not agree with your reasoning and analysis of the NAB case. This is because the Termination Payments are more concerned with the business structure as discussed above in the profit yielding structure section above and the Commissioner considers that the payment of a lump sum clearly relates to the termination of the franchise agreement, which enables the Group to expand its profit yielding structure to areas where it does not have the right to operate a Store X and it gives the Group more autonomy and flexibility, and higher returns. The fact that the payments are made as a lump sum, although not determinative, does add weight to the conclusion that the payments are “once and for all” and more likely capital in nature. | Detailed Reasoning - Conclusion: With regard to the above factors it is considered that on balance the payment to terminate a franchise is not deductible under section 8-1 of the ITAA 1997 on the basis that the character of the expenditure is capital in nature. | Summary: The termination payments made by the Group are deductible over a 5 year period pursuant to section 25-110 of the ITAA 1997 to the extent that the payment relates to the termination of the licence to use the IP. | Detailed Reasoning - Detailed reasoning: Section 25-110 provides a 5-year write-off for capital expenditure incurred to terminate a lease or licence (including an authority, permit or quota) that results in the termination of the lease or licence if the expenditure is incurred in the course of carrying on a business or in connection with ceasing to carry on a business. This is subject to exceptions contained in subsections 25-110(3) to 25-110(6) as discussed below. As the capital expenditure was incurred to terminate a non-exclusive licence for the purposes of section 25-110, the expenditure is deductible under section 25-110. Section 25-110 provides a 5-year write-off for capital expenditure incurred to terminate a lease or licence that results in the termination of the lease or licence if the expenditure is incurred in the course of carrying on a business or in connection with ceasing to carry on a business, subject to exceptions contained in subsections 25-110(3) to 25-110(6). The Termination Payment incurred by the Group secured the termination of the franchise agreements and the termination was an integral part of the Group’s business structure. The payment enabled the Group to terminate a pre-existing franchise agreement so that it was able to operate the franchise as one of its own corporate stores. In that context, the payment 'goes to the character and organisation of the profit-earning business and not to be an incident in the operations by which it is carried on': refer Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634; 8 ATD 190. This makes the payment an affair of capital. The franchise agreements entered into between the Group and the franchisees conferred contractual rights and obligations on both the franchisor and the franchisee. The Termination Payment terminated the various rights and obligations that collectively constitute what the franchisee acquired under the franchise agreement including the right to use the IP in operating the franchise during the term of the agreement, and the contractual right to use the services of the franchisor for purposes of advertising and marketing of their products, management assistance and training. In short, a franchise may include but be wider than a licence, which would appear to be the case here. See Bob Jane T-Marts v FC of T 99 ATC 4437; the definition of 'franchise agreement' in Trade Practices (Industry Codes Franchising) Regulations 1998 Reg 3 ; FC of T v United Aircraft Corporation (1943) 68 CLR 525. The words 'to terminate a lease or a licence' in subsection 25-110(1) entail a direct link between the incurrence of the deductible expenditure and the termination of the lease or licence. In other words, deductible expenditure is that which has been incurred for the purposes of causing or inducing the termination of the lease or licence and has the consequence of having done so. The payment incurred by the group was for terminating all of the rights and obligations under the franchise agreement. So the payment to the franchisee to terminate the franchise was paid by the Group to terminate not only the licence to use the intellectual property but also the contractual obligations under the franchise agreement. In these circumstances, it is reasonable to conclude that only part of the payment can be said to be paid to terminate the licence to use the IP and result in its termination. This part of the payment is eligible for deduction under section 25-110. Apportionment of the payment would therefore be required. Apportionment of the payment must be undertaken using a reasonable method and what is reasonable will often depend on the particular circumstances. Based on the information supplied by the Applicant, it is considered that none of the exceptions contained in subsections 25-110(3) to 25-110(6) apply in this case. | Detailed Reasoning - Question 3: The amount of the deduction pursuant to section 25-110 is not equal to the termination payment as disclosed in the Buy-Back Agreement. | Detailed Reasoning - Detailed reasoning: The termination payments made by the Group are deductible over a 5 year period pursuant to section 25-110 to the extent that the payment relates to the termination of the licence to use the IP. Therefore, the termination payment disclosed in the Buy-Back Agreement will need to be apportioned as discussed in response to question 5 below. | Detailed Reasoning - Question 4: As the amount of the deduction pursuant to section 25-110 is not equal to the termination payment as disclosed in the Buy-Back Agreement, the termination payments are deductible under section 40-880. | Detailed Reasoning - Detailed reasoning: The termination payments made by the Group are deductible over a 5 year period pursuant to section 25-110 to the extent that the payment relates to the termination of the licence to use the IP. Therefore, the termination payment disclosed in the Buy-Back Agreement will need to be apportioned. This apportioned amount will be deductible under section 40-880 and is discussed in response to question 5 below. | Detailed Reasoning - Question 5: The amount of the deduction pursuant to section 40-880 is equal to the portion of the termination payment not otherwise deducted under section 25-110. | Detailed Reasoning - Detailed reasoning: Subject to the limitations and exceptions contained in subsections 40-880(3) to (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: (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. Paragraph 40-880(5)(b) provides that you cannot deduct anything under section 40-880 for an amount of expenditure you incur to the extent that you can deduct an amount for it under a provision of 'this Act' other than section 40-880. In this case it is necessary to consider sections 8-1 and 25-110. As the expenditure incurred by the Group is capital expenditure (see Question 1), the expenditure is not deductible under section 8-1. As the expenditure incurred by the Group is capital expenditure (see Question 2), the expenditure is deductible under section 25-110 to the extent that the payment relates to the termination of the licence to use the IP. Any remaining portions of the Termination Payment can be deducted by the Group under section 40-880.

These reasons for decision will first consider what constitutes the Group’s business and its profit yielding structure. It will then consider the character of the expenditure in terms of the above factors.