Private ruling: Entity expenses - section 8-1 or 40-880 of the Income Tax Assessment Act 1997
Date of advice: 14 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the expenses incurred by the entity deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Are the expenses incurred by the entity deductible under section 40-880 of the ITAA 1997? | A2: Yes


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

Reasons for decision: Summary: Subsection 8-1(1) of the ITAA 1997 states 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. Subsection 8-1(2) of the ITAA 1997 states however, you cannot deduct a loss or outgoing under this section to the extent that: (a) It is a loss or outgoing of capital, or of a capital nature; or (b) It is a loss or outgoing of a private or domestic nature; or (c) It is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) A provision of this Act prevents you from deducting it. It is important to characterise items of expenditure as being on either revenue or capital in nature as section 8-1 of ITAA 1997, the general deductibility provision, is still the source of most tax deductions. This provision only provides a deduction for losses or outgoings of a revenue nature. When considering whether the nature of expenditure is revenue or capital, based on the principles of a case authority (Sun Newspapers Ltd v FCT (1938) 61 CLR 337) the following matters should be considered: • the character of the advantage sought; • the manner in which it is used, relied upon or enjoyed; and • the means adopted to get it. An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature ( British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155). Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature. In this case the amounts paid in order to establish the business were expended to create an asset of a lasting and enduring nature, i.e. the business, therefore the expenses incurred are considered capital in nature and not deductible under section 8-1 of the ITAA 1997. Subsection 40-880(1) of ITAA 1997 states the object of this section 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. 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 - Limitations and exceptions: 40-880(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. 40-880(4) You can only deduct the expenditure, for a business that another entity used to carry on or proposes to carry on, to the extent that: (a) the business was carried on or is proposed to be carried on for a taxable purpose; and (b) the expenditure is in connection with: (i) your deriving assessable income from the business; and (ii) the business that was carried on or is proposed to be carried on. 40-880(5) You cannot deduct anything under this section for an amount of expenditure you incur to the extent that: (a) it forms part of the *cost of a depreciating asset that you hold, used to hold or will hold; or (b) you can deduct an amount for it under a provision of this Act other than this section; or (c) it forms part of the cost of land; or (d) it is in relation to a lease or other legal or equitable right; or (e) it would, apart from this section, be taken into account in working out: (i) a profit that is included in your assessable income (for example, under section 6-5 or 15-15); or (ii) a loss that you can deduct (for example, under section 8-1 or 25-40); or (f) it could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event; or (g) a provision of this Act other than this section would expressly make the expenditure non-deductible if it were not of a capital nature; or (h) a provision of this Act other than this section expressly prevents the expenditure being taken into account as described in paragraphs (a) to (f) for a reason other than the expenditure being of a capital nature; or (i) it is expenditure of a private or domestic nature; or (j) it is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income. 40-880(6) The exceptions in paragraphs (5)(d) and (f) do not apply to expenditure you incur to preserve (but not enhance) the value of goodwill if the expenditure you incur is in relation to a legal or equitable right and the value to you of the right is solely attributable to the effect that the right has on goodwill. 40-880(7) You cannot deduct an amount under paragraph (2)(c) in relation to a business proposed to be carried on unless, having regard to any relevant circumstances, it is reasonable to conclude that the business is proposed to be carried on within a reasonable time. 40-880(8) You cannot deduct anything under this section for an amount of expenditure that, because of a market value substitution rule, was excluded from the cost of a depreciating asset or the cost base or reduced cost base of a CGT asset. 40-880(9) You cannot deduct anything under this section for an amount of expenditure you incur: (a) by way of returning an amount you have received (except to the extent that the amount was included in your assessable income or taken into account in working out an amount so included); or (b) to the extent that, for another entity, the amount is a return on or of: (i) an equity interest; or (ii) a debt interest that is an obligation of yours. In relation to this case the entity incurred expenses in order to start a business. This amount is considered capital and to be in relation to the entity's business. The business was to be conducted for a taxable purpose. None of the exceptions under sections 40-880(3) to 40-880(9) apply. The entity is therefore entitled to claim a deduction for all expenses incurred in relation to the attempt to set up the business under section 40-880 of the ITAA 1997.

Relevant facts: The entity set out to establish a business. | Costs were incurred in relation to setting up the business. | All costs were required to test the feasibility of the location. | For reasons beyond the control of the entity the business was not able to proceed at the specific location so the entity stopped incurring any further expenses. | None of the expenses incurred were reimbursed or refunded. | After the first failed attempt to set up a clinic the entity subsequently continued to search for a new location for the business. | The entity found another site and commenced the business.