Private ruling: Income tax - deductions
Date of advice: 6 November 2025
Published: 22 December 2025
Ruling period: Year ending dd MMM 20XX to dd MMM 20XX
Date scheme commenced: dd MMM 20XX

Ruling: Q1: Are the advisor costs incurred by Company A deductible over X years under section 40-880 of the ITAA 1997? | A1: Yes. | Q2: Are the bonuses incurred by Company A deductible under section 8-1 of the ITAA 1997? | A2: No. | Q3: If the answer to question 2 is 'no', are the bonuses deductible under section 40-880 of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: Summary Company A is an Australian incorporated company that is a resident of Australia. On dd MMM 20XX, the Shareholders agreed to sell their entire shareholding in Company A to the Buyer (Transaction). The agreed terms of the Transaction were set out in the Agreement dated dd MMM 20XX (agreement). Clause x of the Schedule states that no Group Company operates a bonus, profit share or employee incentive plan or scheme for its employees or officers. The completion date of the Transaction was dd MMM 20YY. Advisor costs Company A incurred $X of advisor costs encompassing Advisor advice, lawyers, financial due diligence and tax advice. There were two advisors involved in the Transaction • advisor A dealt with the selling aspect of the sale of Company A. • advisor B dealt with financial and tax due diligence Transaction Bonus Clause x of the Agreement defines the following terms. • Completion means settlement of the sale and purchase of the Shares in accordance with this agreement. • Debt means, in respect of the Group as at the Effective Time, the aggregate of amounts for or in respect of ...(x) any unpaid Transaction Expenses. • Transaction Bonus means any bonus, profit share, incentive or similar payment payable by a Group Company to an officer, employee, contractor or consultant of or to the Group in connection with the transactions contemplated by this agreement, inclusive of any applicable on-costs. • Transaction Expense means ...(x) all Transaction Bonuses. Clause x of the agreement states that within 10 business days of Completion, the Buyer will procure that Company A pay the Transaction Bonuses to employees. The Shareholders decision to pay the Transaction Bonuses was made around one month before the completion date of the Transaction. There were no board minutes kept regarding the discussion on Transaction Bonus payments. The Shareholders agreed to make the payments and then the HR team implemented it. No advanced communication (other than to the Chief Financial Officer (CFO)) was made of the intended bonus payments to the employees. There is no documented remuneration policy and the policy in relation to the Transaction Bonus was established as the Transaction progressed. There is no evidence of how each Bonus payment was calculated. There was no formula or method, other than employees had to have been employed for a minimum number of years. The Transaction Bonuses were paid on or around dd MMM 20XX to staff in a variety of roles across the business. Most employees who received the Transaction Bonus were not aware they were to receive a bonus until the Completion Date of the Transaction, when they were communicated to by management. The Transaction Bonuses averaged $xx per recipient, and the average tenure with Company A of the employees who received the Bonuses was x years. On or around dd MMM 20XX, each recipient of the Transaction Bonus received a letter titled 'Transaction Bonus' which outlined their entitlement to the payment in recognition for their contribution and efforts in connection with the Transaction but also in recognition for their contribution throughout their employment. The Transaction Bonuses were based on the role performed by that recipient and their contribution to the business over their ownership. Those who were paid the larger sums were those who put in substantial extra effort above and beyond their ordinary roles during the Transaction to keep the business running and growing. The employees who were paid the Transaction Bonus engaged in activities such as overseeing the operations and engaging in decision-making about important business strategies, so the business continues to derive income. All employees who received the Transaction Bonus had been employed by Company A for a minimum number of years with the longest serving having been employed for xx years. These employees had played a key role in the Transaction or were instrumental in continuing the drive the sales and financial performance of the business along with product innovation and creating relationships with new customers. Other facts Company A employees had historically not been paid bonuses, other than commissions in respect of people in sales roles. Clause x of the Agreement required the Buyer to request a ruling from the Commissioner of Taxation regarding the deductibility of Transaction Expenses if requested to do so by the Sellers. Since inception, Company A has carried on business in Australia and has derived assessable income. Company A does not and will not generate significant amounts of NANE or exempt income. Income generated from its business activities are included in assessable income.

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


Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax' | The advisor costs incurred by Company A are deductible over five years under section 40-880 of the ITAA 1997. | Detailed reasoning: Section 40-880 allows certain business expenditure to be deducted in equal proportions over five income years where the requirements of the provision are met. Subsection 40-880(2) sets out the requirements for entitlement to the deduction whilst subsections 40-880(3) and 40-880(4) set out limitations. Subsection 40-880(5) then sets out exceptions to the amount deductible under subsection 40-880(2). | 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 operation and scope of section 40-880. | ATO Interpretative Decision ATO ID 2007/109 Capital Allowances: business related costs - in relation to your business sets out the Commissioner's views on capital expenditure in relation to your business. | Capital expenditure in relation to your business (subsection 40-880(2): In considering business capital expenditure to which subsection 40-880(2) applies, the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (the EM) states: | 2.19 Expenditure on the structure by which an entity carries on (or used to or proposes to carry on) their business and on the profit yielding structure of the business would ordinarily be expected to be of a capital nature. Capital expenditure can also relate to a business's trading operations or the entity that will carry on the business. | 2.20. The structure covers the legal entity (such as a company) or the legal relationship (such as a partnership or trust) that is the entity that carries on the business for a taxable purpose and that holds the business assets. | In considering the phrase 'in relation to' contained within subsection 40-880(2), paragraph 2.25 of the EM states: | The provision is concerned with expenditure that has the character of a business expense because it is relevantly related to the business. The concept used to establish this character or requisite relationship between the expenditure incurred by the taxpayer and the business carried on (current, past or prospective) is 'in relation to'. The connector 'in relation to' allows the appropriate latitude to enable the deductibility of qualifying capital expenditure incurred before the business commences or after it has ceased. | ATO ID 2007/109 specially considers the scenario where the taxpayer, a public company, was approached by an unrelated entity with a proposal for the two companies to merge. The result of the arrangement was the taxpayer becoming a wholly owned subsidiary of the unrelated entity through a statutory scheme of arrangement. The ATO considered that there was sufficient and relevant connection between the taxpayer's incurrence of the expenditure on evaluating the merger proposal and the taxpayer's business. | Company A incurred transaction costs, including advisor costs, in connection with the Transaction which resulted in the Shareholders selling 100% of their shares to the Buyer. | The adviser costs were incurred in connection with change of structure through which the business would be carried on and the profit yielding framework of the business. As such, there is a sufficient and relevant nexus between Company A's incurrence of Advisor Costs and its business, and the nature of the expenditure supports its classification as capital. | Carried on for a taxable purpose (subsection 40-880(3): Subsection 40-880(3) provides that you can only deduct the expenditure, for a business that you carry on, to the extent that the business is carried on for a taxable purpose. | The definition of 'taxable purpose' is provided in subsection 40-25(7) to include the purpose of producing assessable income. | It is considered that the advisor costs were incurred in relation to the ongoing business activities of Company A. Clause x of the Agreement required Company A to continue conducting its business in the ordinary course and in substantially the same manner as it was conducted prior to the Agreement. | Company A derives assessable income and does not earn any exempt income or non-assessable non-exempt income. Taking all relevant facts into account, at the time the advisor costs were incurred, Company A was carrying on its business for a taxable purpose. | Therefore, at the time the advisor costs were incurred, Company A was carrying on its business for a taxable purpose. | Other limitations: Subsections 40-880(5) to (9) sets out other limitations and exclusions to deducting expenditure under section 40-880. | On the facts of this case, subsections 40-880(5) to (9) do not apply to limit or exclude deductibility of the advisor costs incurred by Company A under section 40-880. | Conclusion: The advisor costs are capital expenditure which is incurred 'in relation to your business' and therefore deductible under section 40-880. | The bonus payments are not deductible under section 8-1 of the ITAA 1997 as they are not an outgoing that is incurred in gaining or producing Company A's assessable income or necessarily incurred in carrying on its business for the purposes of gaining or producing Company A's assessable income. | Detailed reasoning: Subsection 8-1(1) allows a taxpayer to deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing their assessable income. However, under subsection 8-1(2), a loss or outgoing is not deductible to the extent that it is a loss or outgoing of capital, or of a capital nature. | Paragraph 8-1(1)(a): The first positive limb: The first positive limb of subsection 8-1(1) provides that a loss or outgoing may be deductible to the extent that 'it is incurred in gaining or producing your assessable income'. | In Federal Commissioner of Taxation v Payne (2001) 202 CLR 93 at [9], Gleeson CJ, Kirby and Hayne JJ noted, in respect of section 51(1) of the ITAA 1936, that the language 'incurred in gaining or producing' did not create a test of whether outgoings were incurred 'in connection with' the derivation of assessable income or 'for the purpose of' deriving such income. Rather, the statutory phrase requires analysis of whether the outgoing was incurred 'in' gaining assessable income. | ... It has long been established that "incurred in gaining or producing" is to be understood as meaning incurred "in the course of" gaining or producing. What is meant by being incurred "in the course of" gaining or producing income was amplified in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [(1949) 78 CLR 47 at 57] where it was said that: | to come within the initial part of [s 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. | Ronpibon Tin (N.L.) v Federal Commissioner of Taxation, [1945] HCA 15;(1949) 78 CLR 47 (Ronpibon Tin), provides that it is both sufficient and necessary that the 'occasion' of the loss or outgoing should be found in whatever is productive of 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. As with the process of characterisation necessary to determine whether an outgoing is on capital or revenue account, it is relevant to ask what the outgoing is calculated to effect from a practical or business point of view: Trustees of the Estate Mortgage Fighting Fund Trust v Commissioner of Taxation (2000) 102 FCR 15 at [19] (Hill J), referring to Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648. | In Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxatio n [2020] FCAFC 92 at [33], the full Federal Court held: | While the connection with activities which more directly gained or produced the assessable income need not be direct (Day at [21]), the occasion of the outgoing must be found in what is productive of the assessable income; there must be a sufficient nexus between the outgoing and "the activities which more directly gain or produce the assessable income". | The principles of the positive limbs were most recently discussed in Clough Ltd v Federal Commissioner of Taxation [ 2021] FCA 108 (Clough) and confirmed in Clough Limited v Commissioner of Taxation [2021] FCAFC 197 (Clough Appeal). | Thawley, J in the Clough Appeal noted that: | (a) the payments were not incurred in gaining or producing assessable income on the basis that the occasion of them lay in the takeover and not in gaining or producing assessable income. | (b) the payments were not connected with considerations of business operations, efficiency or expediency. The payments were predominantly connected with facilitating a change in the underlying shareholding of the company and that in the absence of the change in control, no expenditure would have been incurred by Clough. | (c) the takeover was the proximate causal event requiring that the payments be made and the payments would not have been made but for the takeover. | The occasion is not limited to the immediate causes for the payment, although contemporaneous events will be directly relevant and significant, and may in some circumstances, be decisive. While questions of causation (would a payment have been made were it not for the existence of a particular circumstance?) and purpose are relevant, it is necessary to identify and understand the characterisation question having regard to all relevant circumstances. (Thawley J in Clough ) And, after determining this, whether the outgoing is 'incidental and relevant' to the activity or occasion must be considered. ( Watson as Trustee for the Murrindini Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92). | Paragraph 8-1(1)(b) - Second positive limb: The second positive limb of subsection 8-1(1) provides that a loss or outgoing may be deductible under paragraph 8-1(1)(b) to the extent they were 'necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income'. | It has been observed that the second positive limb adds little in practice to the first positive limb (Ronpibon Tin). An outgoing will be "necessarily incurred in carrying on a business" if it is: | (a) "clearly appropriate" or "adapted" for the carrying on of the business; and | (b) "reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business". ( Spriggs v Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1) | To satisfy the second positive limb, two things must be established: firstly, the expense was necessarily incurred in carrying on a business; and secondly, that the carrying on of the business was for the purposes of gaining or producing assessable income. The expense must have been incurred in the carrying on of the business, it must be part of the cost of trading operations (As stated by Menzies J in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30). | The Commissioner considered what was meant by the second positive limb in TR 2011/6: | 73. In contrast, for expenditure to be deducted under the second positive limb of section 8-1, it must be incurred in carrying on a business. To satisfy this requirement, the 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 & Sons Pty Ltd v. FC of T (1958 9) 101 CLR 30 Menzies J stated at page 49: | ...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 . [ emphasis added ] | 74. The test under the second positive limb of section 8-1 is therefore a more demanding test requiring a more immediate or direct link between the expenditure and the process of operating the business than a connection that qualifies the expenditure as being 'in relation to' a business. | In Hallstroms Pty Ltd v Commissioner of Taxation (1946) 72 CLR 634 at 648, Dixon J (dissenting as to the application of principle to the facts) stated: | 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, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. | An examination of the legal rights is important, it being part of the circumstances relevant to a proper characterisation of the expenditure and capable of informing what the expenditure is calculated to effect from a practical and business point of view | The question of characterisation must be approached from the perspective of the person incurring the outgoing. An inquiry into the character of the receipt of the outgoing in the hands of the recipient at best distracts attention from the critical task of characterisation. | Application of the positive limbs to the Transaction Bonus: The Transaction Bonus as defined in the Agreement specifically identifies the payment is made 'in connection with the transactions contemplated by the agreement'. | The Bonus payments was structured around the Shareholders selling their shares in Company A to a third party and therefore inextricably linked to the Transaction. If the Transaction had not occurred, the Transaction Bonus would not have been offered or paid. | The Agreement made provision on how any Transaction Bonus paid would affect the payment required to be made by the Buyer on completion with the Agreement requiring the bonus to be paid within 10 business days of Completion (clause x). For example, | • The Agreement defines "Debt" to include any unpaid Transaction Expense, and "Transaction Expense" are expressly defined to encompass all Transaction Bonuses. A Transaction Bonus refers to any bonus payable in connection with the Transaction. Consequently, the Transaction Bonus form part of Debt which results in a reduction of the Completion Payment or Purchase Price. By reducing the Purchase Price, the Transaction Bonus is effectively treated as a Transaction related cost rather than a trading or operating expense. | • Clause x of the Agreement requires the Buyer must ensure that an amount equal to the tax effect of the deduction for Transaction Bonus is paid to the Sellers as an adjustment to the Purchase Price. | The letter titled 'Transaction Bonus' provided to the recipients after Completion states the bonus was paid not only for their contribution and efforts in connection with the Transaction but also in recognition for their contribution throughout their employment. However, Company A did not have a documented remuneration policy and the policy in relation to the Transaction Bonus was established as the Transaction progressed. There were no board minutes kept regarding the discussion on Transaction Bonus payments. Further, in respect of characterisation of an expense, the Clough Appeal, at [70] noted that: | In light of the above regarding the circumstances surrounding the Transaction Bonus payments, the only reasonable conclusion is that the occasion for the payment of the bonus is because of the Transaction. | Conclusion on positive limb of section 8-1: The Transaction Bonuses were not incurred in the nature of a working expense in the carrying on of Company A's business. They were instead concerned with the ownership of Company A and the takeover of its business. Expenditure which is concerned with the takeover of a business is not relevant or incidental to gaining or producing assessable income or carrying on a business for the purpose of gaining or producing assessable income. | Accordingly, subsection 8-1(1) is not satisfied. | Subsection 8-1(2) - negative limbs: As the positive limbs are not satisfied, it is not necessary to determine whether the Transaction Bonus would properly be characterised as being capital, or of a capital nature. | Notwithstanding this, the Transaction Bonus are considered to be capital, or of a capital nature (paragraph 8-1(2)(a)) for similar reasons the bonus fails the positive limb in subsection 8-1(1). For example, the Transaction Bonus payment was not in the nature of a working expense in the carrying on of Company A's business, but instead concerned with the ownership of Company A and the takeover of its business which creates an enduring benefit which is of a capital nature. | Conclusion: The Transaction Bonuses are not deductible under section 8-1. | The bonus payments are capital expenditure which is deductible over a period of five income years, starting in the year in which the expenditure is incurred. | Detailed reasoning: As stated above, the Transaction Bonus payments are inextricably linked to the takeover of Company A's business and the occasion is found in the Transaction. Therefore, the expenditure was not incurred as part of Company A's trading operations, but rather incurred in connection with a structural change to the business (change of ownership). As such, the Bonus payments are characterised as capital in nature. | Therefore, based on the same reasons stated in question 1 above, the Transaction Bonus payments are capital expenditure which is incurred in relation to your business and therefore deductible under section 40-880 over a period of five income years.