Private ruling: Section 40-880 income tax deduction and Capital Gains Tax
Published: September 2013

Ruling: Q1: Is Company A, as head company of the tax consolidated group, entitled to a deduction under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of Share Transfer Duty paid by a member of the tax consolidated group. | A1: Yes. | Q2: Does the Asset Transfer Duty paid by Company D form part of the cost base and reduced cost base of certain assets for the purposes of Part 3-1 of the ITAA 1997. | A2: Yes.

Relevant facts and circumstances: Company A is the 'head company' of an income tax consolidated group. Company A and its subsidiaries carry on business in Australia. Company A holds all of the shares in Company B which in turn holds all of the shares in Company D. Company D held direct ownership interests in various entities which carry out business activities for certain operations (' Core Operations Business' ), and in other entities for certain other operations (' Non-core Operations Business' ). The restructure Company A's Group undertook a corporate restructure to align the legal ownership of the Core Operations Business and the Non-core Operations Business with the entities that carry on the respective businesses ('Restructure') in order to achieve greater efficiency and transparency. The Restructure involved the transfer of shares held in Company D and of certain assets. Key steps in the Corporate Restructure All of the membership interests held in entities that carry on the Non-core Operations Business were transferred to Company D. Company B transferred all of the shares it held in Company D to another entity which was a member of Company A's consolidated group. Certain assets held by Company B were transferred to Company D. The assets are CGT assets. Each transaction occurred between members of the same income tax consolidated group. The entity which obtained the shares in Company B paid Share Transfer Duty for the acquisition which happened after 1 July 2005. In addition, Company D paid Asset Transfer Duty upon acquisition of the assets.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) Section 40-880 ITAA 1997 Subsection 40-880(2) | ITAA 1997 Subsection 40-880(3) | ITAA 1997 Paragraph 40-880(5)(d) | ITAA 1997 Paragraph 40-880(5)(f) | ITAA 1997 Section 110-35 | ITAA 1997 Subsection 110-35(1) | ITAA 1997 Subsection 110-35(4) | ITAA 1997 Subsection 110-35(10)

Reasons for decision: Summary: Company A is entitled to a deduction for the Share Transfer Duty over five years pursuant to section 40-880. | Detailed Reasoning - Relevant legislation: The object of section 40-880 as set out in subsection 40-880(1) is: … to make certain *business capital expenditure deductible over 5 years if: (a) the expenditure is not otherwise taken into account; and (b) a 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. Subject to subsequent subsections, subsections 40-880(2) provides for a deduction for 'Business related costs' as follows: 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. Where the taxpayer carries on the business, the relevant limitations and exceptions are set out in subsections 40-880(3) and (5). In the circumstances of Company A, the relevant limitations and exceptions are subsection 40-880(3) and paragraphs 40-880(5)(d) and (f): (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, was carried on or is proposed to be carried on for a *taxable purpose. …. (5) You cannot deduct anything under this section for an amount of expenditure you incur to the extent that: … (d) it is in relation to a lease or other legal or equitable right; 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 … | Detailed Reasoning - ATO view on section 40-880: The ATO-view on the application of section 40-880 is set out in Taxation Ruling TR 2011/6: Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues . Relevant paragraphs of the Taxation Ruling are: 59. The object of section 40-880 is to allow a deduction over five years for certain business capital expenditure, incurred on or after 1 July 2005, if: • it is not otherwise taken into account or denied deduction by some other provision; and • the business is, was or is proposed to be carried on for a taxable purpose. 60. A number of tests about the expenditure must be satisfied to initially establish an entitlement to a deduction. The provision then limits and excludes the amount of expenditure the taxpayer can deduct by imposing further tests on the expenditure and the business itself. … 82. In many cases, the description of what the expenditure is for will be enough to demonstrate the relationship with the former, proposed or existing business. The connection will be readily evident. For example, capital expenditure incurred to establish the structure (that is, the entity) that is to carry on a proposed business has a clear connection with that proposed business. Likewise, expenditure on converting an existing business structure to a different structure which is to carry on that business in future, for example, from a sole trader or partnership to a company, demonstrates a relevant connection with the existing business being carried on (as well as with the carrying on of that business in the future). … 92. Capital expenditure that also has the essential character of a business expense includes expenditure on activities that prepare for the commencement of the business. Some typical examples are market research or writing a business plan. This expenditure is directed to meeting the anticipated commercial requirements of the proposed business operations and necessarily satisfies the description of being 'in relation to' the business. … 157. The taxable purpose of the business is tested as at the time the expenditure is incurred. Where expenditure is incurred for an existing or proposed business, the test takes into account all known and predictable facts about the taxable purpose of the business in future years - not just in the year the expenditure is incurred or the years for which a deduction under section 40-880 is sought. … 225. Paragraph 40-880(5)(d) replicates the former paragraph 40-880(3)(d). The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 5) 2002 ('2002 Explanatory Memorandum') which introduced the former section 40-880 provides the following explanation at paragraph 3.67 about the meaning of the expression 'in relation to a lease or other legal or equitable right': The Government is reviewing the treatment of expenditure incurred in relation to leases or other legal or equitable rights as part of the consideration of the recommendations of the Review of Business Taxation. The appropriate income tax treatment of capital expenditure incurred in relation to these leases and rights will be determined as part of that review. Consequently, capital expenditure on leases or other legal or equitable rights will be excluded from deduction under section 40-880. For example, expenditure representing lease surrender payments incurred in closing down your business will not be deductible under section 40-880. … 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). | Detailed Reasoning - ATO-view on incidental costs incurred in relation to intra-consolidated group membership interests: The ATO-view on certain incidental costs incurred by the head company of a consolidated group is set out in Taxation Determination TD 2011/9: Income tax: consolidation: capital gains: does paragraph 40-880(5)(f) of the Income Tax Assessment Act 1997 prevent the deduction, under section 40-880 of that Act, of incidental costs described in subsection 110 35(2) of that Act that the head company of a consolidated group or MEC group incurs, in acquiring shares in an entity that becomes a subsidiary member of the group, after the entity joins the group? Paragraphs 13 and 14 of the Taxation Determination states: 13. Under the [Consolidation Single Entity Rule] SER, an entity that is a subsidiary member of a consolidated group or MEC group for any period is taken to be part of the head company during that period for the purposes of working out the head company's liability to income tax or loss of any sort for income years in which any of the period occurs and subsequent income years. … A consequence of the SER is that when an entity becomes a subsidiary member of a consolidated group the membership interests in the entity held by the group are ignored for those purposes. … This means that while the SER applies, the incidental costs cannot be included in the cost base or reduced cost base of the shares. 14. For the purpose of characterising the incidental costs when they are incurred, the head company is not required to anticipate whether or not the expenditure is related to assets (such as the shares) that may be recognised for the purposes mentioned in paragraph 13 of this Determination at some time in the future. … Even when the head company does recognise the shares for those purposes just before the subsidiary member leaves the group, the method for reconstructing the cost base or reduced cost base of the shares does not take into account the incidental costs of acquiring the shares. … | Detailed Reasoning - Application to the circumstances of Company A: In order for the Share Transfer Duty to qualify as a deduction pursuant to section 40-880, the requirements in each of subsections 40-880(2) and (3) and paragraphs 40-880(5)(d) and (f) inclusive must be satisfied. For the present purposes, the exceptions in subsections 40-880(4) and (6)-(9) inclusive are not relevant. | Detailed Reasoning - Business capital expenditure subsection 40-880(2): As set out in paragraph 59 of TR 2011/6, section 40-880 only applies to business related capital expenditure which is incurred on or after 1 July 2005. The Share Transfer Duty was paid by a subsidiary entity that was a member of Company A's consolidated group after 1 July 2005 for the acquisition of shares in Company D Shares . Accordingly, the expenditure was incurred after 1 July 2005. | Detailed Reasoning - The expenditure must be capital in nature: 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 including the classic as per the judgment of Dixon J in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; (1938)1 AITR 403 ( Sun Newspapers ). The Share Transfer Duty was paid by an entity that was a member of Company A's consolidated group as a result of the transfer of shares held in Company D as part of the Restructure, which directly supports, and relates to, the underlying profit yielding structure of Company A's Group as a whole. The benefit sought in paying the Share Transfer Duty was compliance with the relevant legislation and ensuring the enforceability of the transaction documents effecting the Restructure. The Share Transfer Duty was paid in respect of shares held in a subsidiary which have lasting qualities and endures for the benefit of the Group and therefore the expenditure is capital in nature. | Detailed Reasoning - The capital expenditure must be business related: Where the taxpayer is the head company of a consolidated group, 'your business' refers to the overall business of the head company. Under the single entity rule in section 701-1, subsidiary members are taken to be parts of the head company during the period that they are members of the consolidated group. The single entity rule operates for the purposes of working out the head company's and subsidiary member's liability for income tax and the amount of the loss for a relevant period. Company D, Company B and the other entity were subsidiary members of the same consolidated group during the income year in which the Share Transfer Stamp Duty was incurred. Consequently, the expenditure must be characterised subject to the application of the single entity rule. For these purposes, Company D, Company B and the other entity are taken to be parts of Company A and activities and operations undertaken by these subsidiary members are taken to be those of Company A. Subsection 40-880(2) requires the identification of the business in relation to which the relevant capital expenditure was incurred. As stated in the Relevant facts and circumstances , Company A and its subsidiaries carry on the business in Australia including the Core Operations Business and the Non-core Operations Business . Consistent with paragraph 82 of TR 2011/6, the description of what the expenditure is for in Company A's circumstances is sufficient to demonstrate the relationship with the existing business. The Share Transfer Duty was incurred as a necessary part of the Restructure which achieved the structural separation of the Core Operations Business from the Non-core Operations Business . Accordingly, for the purposes of section 40-880, there is a readily evident connection between the payment of the Share Transfer Duty and the business carried on by the group pursuant to paragraph 40-880(2)(a). The capital expenditure must relate to the taxpayer's current business, a former business carried on by the taxpayer or another entity or a proposed business to be carried on by the taxpayer or another entity Entitlement to a deduction may arise under one of the disjunctive paragraphs 40-880(2)(a) - (c) inclusive. Paragraph 40-880(2)(a) provides an entitlement to a deduction for capital expenditure incurred in relation to an existing business. Paragraph 98 of TR 2011/6 states that the expenditure must relate to an existing business the taxpayer is carrying on at the time they incur the expenditure. The Share Transfer Duty paid by a subsidiary entity that was a member of Company A's consolidated group for the acquisition of shares in Company B was incurred by Company A (as the head company) in relation to Company A's overall business, which includes the Core Operations Business and the Non-core Operations Business . Accordingly the Share Transfer Duty satisfies the paragraph 40-880(2)(a) requirement. The Share Transfer Duty paid by Company A as head company satisfies all of the requirements of subsection 40-880(2). | Detailed Reasoning - The relevant limitations and exceptions: Extent of taxable purpose subsection 40-880(3) 'Taxable purpose' is defined in subsection 40-25(7) to mean: (a) the *purpose of producing assessable income; or … Paragraph 157 of TR 2011/6 states that the taxable purpose of the business is tested at the time the expenditure is incurred. The 'purpose of producing assessable income' is defined in subsection 995-1(1) as being something done: (a) for the purpose of gaining or producing assessable income; or (b) in carrying on a *business for the purpose of gaining or producing assessable income. In accordance with paragraph 157 of TR 2011/6, in Company A's circumstances, the Share Transfer Duty paid is wholly for a taxable purpose pursuant to paragraph (a) of the definition of taxable purpose. Company A is the head company of an Australian income tax consolidated group. Company A and its subsidiaries carry on business in Australia for the purpose of producing assessable income. | Detailed Reasoning - No other income tax recognition subsection 40-880(5): As stated above for Company A's circumstances, the relevant restrictions in subsection 40-880(5) are set out in paragraphs 40-880(5)(d) and 40-880(5)(f). Paragraph 40-880(5)(d) - Expenditure in relation to a lease or other legal or equitable right The expression 'in relation to a lease or other legal or equitable right' or any part of the expression is not defined in the legislation. Consistent with paragraph 225 of TR 2011/6, in Company A's circumstances, the Share Transfer Duty was incurred in relation to the acquisition of shares held in Company B. The shares are not leasing rights for the exploitation of assets and do not reflect the other types of rights contemplated by paragraph 40-880(5)(d). Accordingly paragraph 40-880(5)(d) does not deny a deduction for the Share Transfer Duty. Paragraph 40-880(5)(f) - Expenditure could be taken into account in working out the amount of a capital gain or capital loss from a CGT event Paragraph 258 of TR 2011/6 states that paragraph 40-880(5)(f) denies a deduction where the expenditure forms part of the capital proceeds, cost base or reduced cost base that would be used in working out a capital gain or capital loss arising from a CGT event. However, where the expenditure relates to membership interests held in a subsidiary member of a consolidated group and is not incurred for acquisition or disposal of those membership interests by the group, the relevant ATO view is set out in paragraphs 13 and 14 of Taxation Determination TD 2011/9 set out above. As the Share Transfer Duty was incurred by Company A in respect of intra-group membership interests following the joining time of the relevant members, the reasoning stated in paragraphs 13 and 14 of TD 2011/9 applies. Therefore, paragraph 40-880(5)(f) does not deny Company A's entitlement to a deduction for the Share Transfer Duty pursuant to section 40-880. | Detailed Reasoning - Conclusion: In the circumstances of Company A, the Share Transfer Duty qualifies for a deduction over 5 years pursuant to subsection 40-880(2) and is not limited by nor excepted from such deduction by any of the subsequent provisions in section 40-880. | Summary: The Asset Transfer Duty forms part of the cost base and reduced cost base of the assets for the purposes of Part 3-1. | Detailed Reasoning - Relevant legislation: Subsection 108-5(1) provides that a CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. Subsections 110-35(1) and (10) for incidental costs provide: (1) There are a number of incidental costs you may have incurred. Except for the ninth , they are costs you may have incurred: (a) to *acquire a *CGT asset; or (b) that relate to a *CGT event. … (10) The ninth is expenditure that: (a) is incurred by the *head company of a *consolidated group or *MEC group to an entity that is not a *member of the group; and (b) reasonably relates to a *CGT asset *held by the head company; and (c) is incurred because of a transaction that is between members of the group. | Detailed Reasoning - Example:: Land is transferred by one company to another company. The companies are members of a consolidated group. Stamp duty is payable as a result of the transaction. The transaction has no taxation consequences because of its intra-group nature. The stamp duty is included in the cost base and reduced cost base of the land. Note: Intra-group assets are not held by the head company because of the operation of subsection 701-1(1) (the single entity rule). An example of an intra-group asset is a debt owed by a member of the consolidated group to another member of the group. | Detailed Reasoning - Application to the circumstances of Company A: Subsection 110-35(10) is concerned with expenditure incurred by a head company of a consolidated group to an entity that is not a member of the group which reasonably relates to a CGT asset held by the head company and is incurred because of a transaction that is between members of the group. In the circumstances of Company A, the Asset Transfer Duty was incurred by Company A as the head company of a consolidated group to an entity outside the group being the Revenue Commissioner of the specific state. The Asset Transfer Duty was incurred as a result of a transaction between members of the consolidated group. The assets are CGT assets. Accordingly, as each of the requirements of subsection 110-35(10) is satisfied, the Asset Transfer Duty forms part of the cost base and reduced cost base of the Licences for the purposes of Part 3-1.

Reasons for decision: All legislative references are to provisions of the Income Tax Assessment Act 1997 unless specified otherwise.