Private ruling: Income tax - deductions
Date of advice: 13 February 2026
Published: 30 March 2026
Ruling period: 1 July 20XX to 30 June 20YY
Date scheme commenced: DD Month YYYY

Ruling: Q1: Can Company A claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)for the termination fee paid to Company C under the termination deed? | A1: No. | Q2: If Company A cannot claim a deduction under section 8-1 of the ITAA 1997for the termination fee, can it instead claim a deduction under section 40-880 of that Act? | A2: Yes.

Relevant facts and circumstances: Company A carried on a business which derived assessable income. Company A was wholly owned by Company B. Company A was not a 'subsidiary member' of a consolidated group (as defined in section 703-15 of the ITAA 1997) because Company B did not make an election under section 703-50 of that Act to form a consolidated group. During the course of its business, Company A had entered into an agreement with Company C. Under the agreement, Company A was required to pay fees annually to Company C for the services it provided to Company A. Over time, the fees that were payable to Company C grew beyond what Company A had initially envisaged and Company A had made a number of attempts to re-negotiate or terminate the agreement. The agreement could, in practice, only be terminated by mutual agreement. Despite multiple attempts to secure Company C's agreement to terminate the agreement, the agreement was not terminated because Company C preferred to keep the agreement in place. On DD Month YYYY, Company X made a non-binding offer to acquire Company B (including Company A). The offer required the agreement with Company C be terminated prior to the completion of the takeover. On DD Month YYYY, Company A entered into a termination deed with Company C to terminate the agreement. Under the termination deed, Company A will pay the termination fee to Company C and both parties agree to terminate the agreement. The termination deed was conditional on the Company X takeover completing. If the takeover did not complete, the termination deed would not have effect and the agreement between Company A and Company C would continue. On the same day, Company B and Company A entered into a share subscription deed. Under the share subscription deed, Company X agreed to acquire Company B and Company A. The acquisition was conditional on the termination of the agreement between Company A and Company C. If the agreement was not terminated by the share subscription deed deadline, Company X may terminate the share subscription deed. Company X completed its takeover of Company B and Company A on DD Month YYYY, with Company B and Company A becoming subsidiary members of the Company X consolidated group.

Relevant legislative provisions: • Section 8-1 of the Income Tax Assessment Act 1997 | • Section 40-880 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Subsection 8-1(1) states that you can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. | Detailed Reasoning - Termination fee was not incurred in gaining or producing Company A 's assessable income: Whether an outgoing is wholly or partly 'incurred in gaining or producing' assessable income, under paragraph 8-1(1)(a), is a question of characterisation of the expenditure( Fletcher v Federal Commissioner of Taxation [1991] HCA 42). An outgoing will not properly be characterised as having been incurred in gaining or producing assessable income unless it was 'incidental and relevant to that end'( Fletcher , Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15, Charles Moore and Co (WA) Pty Ltd v Federal Commissioner of Taxation [1956] HCA 77, Lunney v Commissioner of Taxation [1958] HCA 5). 'Incurred in gaining or producing' has been understood as meaning incurred 'in the course of' gaining or producing ( Amalgamated Zinc (De Bavay's) Limited v Federal Commissioner of Taxation [1935] HCA 81, Ronpibon Tin , Charles Moore , Commissioner of Taxation v Payne [2001] HCA 3). What is meant by being incurred 'in the course of' gaining or producing income was set out in Ronpibon Tin where it was said that: ...to come within the initial part of [subsection 51(1)] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. The 'occasion of the loss or outgoing' is to be found after an examination of all relevant circumstances giving rise to the outgoing and it is necessary to look at the 'essential character' of the expenditure ( Trustees of the Estate Mortgage Fighting Fund Trust v Commissioner of Taxation [2000] FCA 981). It is relevant to consider what the outgoing is calculated to effect from a practical or business point of view ( Trustees of the Estate Mortgage Fighting Fund Trust , referring to Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946]HCA 34). Company A derived assessable income from the operation of its business. The agreement with Company C was entered in the course of Company A's business activities. Although the agreement was entered in the course of Company A's business activities, the termination fee paid to Company C under the termination deed was not 'incurred in gaining or producing' Company A's assessable income. Despite the termination fee bringing an end to the agreement, the 'occasion of the loss or outgoing' lay in the Company X acquisition of Company A (and Company B). The agreement with Company C, in practice, could only be terminated by mutual agreement. It was clear that Company A had intentions to re-negotiate or terminate the agreement because the fees payable to Company C grew to an amount beyond what Company A had originally envisaged when it entered into the agreement. Despite these intentions, Company A was unsuccessful in securing Company C's agreement during its repeated attempts to re-negotiate or terminate the agreement because Company C preferred to keep the agreement in place. Company X's takeover proposal required the agreement with Company C be terminated prior to completion of the takeover. This expectation was understood by all parties during negotiations and was later formalised in the share subscription deed where the completion of the deed was conditional on the termination of the agreement between Company A and Company C. If the agreement was not terminated by the share subscription deed deadline, Company X may terminate the share subscription deed. The termination deed was conditional on the Company X takeover completing. If the takeover did not complete, the termination deed would not have effect and the agreement between Company A and Company C would continue. In Clough Limited v Commissioner of Taxation [2021] FCAFC 197, the taxpayer entered into an agreement whereby its majority shareholder would acquire the remaining shares in Clough. As a condition precedent to the agreement, Clough made offers to buy out its employees' entitlements under its employee option plan and employee incentive scheme. The payments were conditional on the agreement becoming effective. In denying a deduction under section 8-1, the Full Federal Court confirmed the Federal Court's finding that the payments were made because of the change in control of Clough, which was seen to have triggered an obligation to pay out the rights, rather than made in meeting employee entitlements on a change of control. Like in Clough , the termination fee was brought about by the Company X takeover and was required to effect a change of ownership of Company A. The termination fee was not a payment made with the purpose of bringing Company A's annual fee obligation to Company C to an end, even though it had that result. The Company X takeover was the proximate causal event requiring the termination fee be made and the payment would not have been made but for the takeover. If the takeover was unsuccessful, the termination deed would not have had effect and Company A would no longer be required to pay the termination fee. Had it not been for the takeover, the agreement with Company C would have remained in place and Company A would have continued being subject to its annual fee obligation. Accordingly, the termination fee was not incurred in gaining or producing Company A's assessable income and paragraph 8-1(1)(a) is not satisfied. | Detailed Reasoning - Termination fee was not necessarily incurred in carrying on a business for the purpose of gaining or producing Company A 's assessable income: To be deductible under paragraph 8-1(1)(b), a loss or outgoing must have the character of a working or operating expense of the entity's business or be an essential part of the cost of its business operations. In John Fairfax and Sons Pty Ltd v Commissioner of Taxation (Cth) [1959] HCA 4,Menzies J stated: ... there must, if an outgoing is going to fall within its terms, be found (i) that it was necessarily incurred in carrying on a business; and (ii) that the carrying on of the business was for the purpose of gaining assessable income. The element that I think is necessary to emphasise here is that the outlay must have been incurred in the carrying on of a business, that is, it must be part of the cost of trading operations. A loss or outgoing will be 'necessarily incurred in carrying on' a business if it is 'clearly appropriate' or 'adapted' for the carrying on of the business or if it is 'reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business' ( Ronpibon Tin NL , Spriggs & Riddell v Commissioner of Taxation [2009] HCA 22, Magna Alloys & Research Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [1980] FCA 180). Whether an expenditure is appropriate and adapted necessarily involves an examination of all of the business operations carried on over time and the whole course of events relevant to the particular expenditure at issue ( Commissioner of Taxation v Day [2008] HCA 53). Like in Clough , the termination fee was not in the nature of a working expense in the carrying on of Company A's business. The incurrence of the expense was part of the activity required for Company X to acquire Company A (and Company B) under the share subscription deed. It was not involved in or connected to an activity that may be described as carrying on Company A 's business. Accordingly, the termination fee was not 'necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income' within the meaning of paragraph 8-1(1)(b). | Detailed Reasoning - Conclusion: As neither paragraph 8-1(1)(a) nor (b) are satisfied, Company A cannot claim a deduction under section 8-1 for the termination fee. | Detailed Reasoning - Question 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 in relation to your business (paragraph 40-880(2)(a)). You can only deduct the expenditure to the extent that the business is carried on for a taxable purpose (subsection 40-880(3)). However, you cannot deduct anything under section 40-880 for an amount of expenditure you incur to the extent that it satisfies any of the conditions under subsections 40-880(5), (8) and (9). | Detailed Reasoning - Termination fee is a capital expenditure: The expression 'capital expenditure' is not a defined term. Whether expenditure is capital in nature is determined on the facts of each particular case having regard to the principles established by case law (paragraph 64 of Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues ). 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, the difference between the outlay and returns representing profit and loss ( Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73). Further, when considering whether an outlay is revenue or capital in nature the following matters are relevant: (a) the character of the advantage sought (b) the manner in which it is to be used, relied upon or enjoyed, and (c) the means adopted to obtain it.( Sun Newspapers ) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view ( Hallstroms ). The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for 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 ( GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) [1990] HCA 25, Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35). 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 was outlined in British Insulated and Helsby Cables Ltd v. Atherton [1926] AC 205 where Viscount Cave 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. In Foley Brothers Pty Ltd v. FC of T (1965) 13 ATD 562; (1965) 9 AITR 635, outgoings incurred for the purpose of altering the organisation or structure of the profit-yielding subject (including its demise) were considered to be of a capital nature. In Company A's case, as outlined in Question 1 above, the termination fee was incurred to terminate the agreement with Company C as required by the terms of Company X's takeover of Company A. It facilitated the change of ownership of Company A and concerned the structure of the business - a change in control of a business is not part of the everyday operation of Company A's business. The termination fee was a one-off payment that brought about an enduring benefit for Company A. Accordingly, the termination fee is a capital expenditure. | Detailed Reasoning - Company A's business is carried on for a taxable purpose: Subsection 40-880(3) limits the deduction for the expenditure to the extent that it relates to the business being carried on for a taxable purpose. Subsection 995-1(1) defines 'taxable purpose' as having the meaning given by section 40-25 which, relevantly, is the purpose of producing assessable income (paragraph 40-25(7)(a)). 'Purpose of producing assessable income' is defined in subsection 995-1(1) as being something done for the purpose of gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income. If the expenditure relates to the whole of a business only some of which is carried on for a taxable purpose, deduction for the expenditure under subsection 40-880(2) will be limited accordingly by the application of subsection 40-880(3) (paragraph 156 of TR 2011/6). The taxable purpose of the business is tested as at the time the expenditure is incurred (paragraph 157 of TR 2011/6). As the termination fee was incurred in facilitating the takeover of Company A by Company X, the expenditure relates to the whole of Company A's business. At the time the termination fee was incurred, Company A derived assessable income from its business activities. Company A did not derive any exempt income or non-assessable non-exempt income from its business activities. As Company A's business activities were carried on wholly for a taxable purpose, no apportionment of its deduction under subsection 40-880(2) will be required under subsection 40-880(3). | Detailed Reasoning - The exceptions under subsections 40-880(5), (8) and (9) do not apply: None of the exceptions under subsection 40-880(5) apply, in relation to the termination fee, because the termination fee: • did not form part of the cost base of a depreciating asset that Company A holds (paragraph 40-880(5)(a)) • Company A cannot deduct an amount for it under another provision of the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997 (paragraph 40-880(5)(b)) • did not form part of the cost of land (paragraph 40-880(5)(c)) • is not in relation to a lease or other legal or equitable right (paragraph 40-880(5)(d)) • is not taken into account in working out a profit that is included in Company A's assessable income or a loss that it can deduct (paragraph 40-880(5)(e)) • is not taken into account in working out the amount of a capital gain or capital loss from a CGT event (paragraph 40-880(5)(f)) • would not otherwise be treated as non-deductible by another provision of the ITAA 1936 or ITAA 1997 if it were not of a capital nature (paragraph 40-880(5)(g)) • is not expressly prevented by any other provision of the ITAA 1936 or ITAA 1997 from being taken into account as described in paragraphs 40-880(a) to (f) for a reason other than it being of a capital nature (paragraph 40-880(5)(h)) • is not of a private or domestic nature (paragraph 40-880(5)(i)); and • was not incurred in relation to gaining or producing exempt income or non-assessable non-exempt income (paragraph 40-880(5)(j)). The exception under subsection 40-880(8) does not apply to the termination fee as the termination fee is not excluded from the cost of a depreciating asset or the cost base or reduced cost base of a CGT asset because of a market value substitution rule. The exception under subsection 40-880(9) also does not apply to the termination fee as the termination fee is not a return on or of an equity interest or debt interest. | Detailed Reasoning - Conclusion: As the termination fee is a capital expenditure that Company A incurred in relation to its business, which was carried on for a taxable purpose, it can deduct the expenditure under subsection 40-880(2) in equal proportions over a period of 5 income years starting in the year in which it incurred it. The deduction will not be limited by subsections 40-880(3), (5), (8) or (9).

Reasons for decision: All legislative references are to the ITAA 1997, unless otherwise indicated.