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In working out the first element of cost, does the taxpayer incur a liability to pay an amount under Item 2 in the table in paragraph 40-185(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) if the liability incurred by the taxpayer is the allotment of ordinary shares in the taxpayer, in return for depreciating assets contributed by an entity?

No. The taxpayer does not incur a liability to pay an amount under Item 2 in the table in paragraph 40-185(1)(b) of the ITAA 1997. Allotting shares is not the payment of an amount.

The taxpayer raises funds by entities making contributions under a written agreement. Contributions that the contributing entities are obliged to make to the taxpayer under the agreement can be made in the form of depreciating assets, to which Division 40 of the ITAA 1997 applies. On receiving contributions, the taxpayer begins to hold the depreciating assets under Item 10 in the table in section 40-40 of the ITAA 1997.

Under the terms of the agreement, the taxpayer has a presently existing contractual obligation to issue ordinary shares to the contributing entities at a defined future time, in return for contributions made by the entities.

The first element of cost is worked out as at the time when the asset starts to be held (section 40-180 of the ITAA 1997). In certain circumstances, the cost is the amount specified in the table in subsection 40-180(2) of the ITAA 1997. Otherwise, the cost is worked out under section 40-185 of the ITAA 1997 (subsection 40-180(1) of the ITAA 1997).

No item in the table in subsection 40-180(2) of the ITAA 1997 applies to the taxpayer's circumstances. The amount the taxpayer is taken to have paid to hold the depreciating assets must, therefore, be worked out under section 40-185 of the ITAA 1997.

The table in paragraph 40-185(1)(b) of the ITAA 1997 recognises in cost two forms of consideration made in order to hold a depreciating asset: payment of an amount measured in money, and provision of a non-cash benefit, measured at market value, in the form of property or services. Items 1, 2 and 3 in that table involve the payment of money. Items 4, 5 and 6 in that table concern the provision of a non-cash benefit.

Item 2 in the table in paragraph 40-185(1)(b) of the ITAA 1997 (Item 2) provides that where you incur or increase a liability to pay an amount, the amount taken to have been paid to hold a depreciating asset is the amount of the liability when you incurred or increased it. It applies to the case where a liability to pay money is incurred or increased in order to hold a depreciating asset (Paragraph 2.21 of Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 ).

In Burrill v. Federal Commissioner of Taxation (1996) 67 FCR 619; (1996) 33 ATR 133; 96 ATC 4629, the Federal Court stated that: Shares are not, and do not involve, a promise to pay money: they do not find expression in cash or sound in money. When shares are the consideration for another's promise, they are as much a consideration in kind as a bag of wheat or a horse.

Issuing shares is not the making of a payment of an amount for the purposes of Division 40 of the ITAA 1997. Therefore, the taxpayer does not incur a liability to pay an amount under Item 2 in the table in paragraph 40-185(1)(b) of the ITAA 1997.