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Is capital expenditure incurred to incorporate a company for the purpose of acquiring an existing business deductible under paragraph 40-880(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) if the business is not actually acquired?

Yes. Capital expenditure incurred to establish the corporate structure through which a business is proposed to be carried on is deductible under paragraph 40-880(1)(a) of the ITAA 1997 provided the expenditure is incurred for the requisite purpose and the other requirements of section 40-880 of the ITAA 1997 are satisfied.

The taxpayer incorporated a company for the purpose of acquiring and operating an existing business. The taxpayer incurred various capital costs to incorporate the company including fees payable under the Corporations Act 2001 to register the company with the Australian Securities and Investments Commission. The company entered into a contract, which was subject to obtaining finance, to acquire the existing business. The company's application for finance was not successful with the result that the company was unable to proceed with the purchase.

Capital expenditure to establish a business is generally different to and separate from capital expenditure to establish the structure through which the business is to be carried on.

Broadly speaking, paragraph 40-880(1)(a) of the ITAA 1997 provides a deduction for capital expenditure to establish a 'business structure'. The term 'business structure' covers the legal entity (such as a company) or the legal relationship (such as a partnership or trust) that is established as the entity that will carry on the business for a taxable purpose and that will hold the business assets. Expenditure to incorporate a company, form a partnership or create a trust would generally satisfy this provision.

A deduction for capital expenditure to establish the business structure under subsection 40-880(1) of the ITAA 1997 is only available to the extent the business is, was or will be carried on for a taxable purpose. It is necessary, therefore, that the expenditure is incurred for the appropriate purpose. In this context, a deduction continues to be available even though the business is not actually acquired, provided the expenditure is incurred for the purpose of establishing a structure through which a business is proposed to be carried on for a taxable purpose. However, the taxpayer would need to be able to clearly and objectively support their contention that a business was proposed to be carried on for a taxable purpose.

The taxpayer in this case can support the purpose of the expenditure by a variety of activities including entering into a purchase contract and applying (albeit unsuccessfully) for finance.