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Is capital expenditure incurred to obtain professional advice about adopting a constitution for the purpose of forming a company deductible under paragraph 40-880(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Capital expenditure incurred to obtain professional advice about adopting a constitution for the purpose of forming a company is deductible under paragraph 40-880(1)(a) of the ITAA 1997 provided the other requirements of section 40-880 of the ITAA 1997 are satisfied.

The taxpayer decided to acquire and operate an existing business through a company. The taxpayer sought advice from their accountant on the process that needed to be followed to incorporate the company and from their legal advisor on the drafting of a constitution for the company. The taxpayer paid fees to both the accountant and lawyer for this advice.

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

Incorporation of a company is achieved by registering it pursuant to the Corporations Act 2001 . Registration usually requires the lodgment of an application for registration and, where appropriate, a constitution with the Australian Securities and Investments Commission. This means that a company comes into existence or is established on the date it is registered.

Settling on the contents of a company constitution and registering the company are both integral to establishing a company structure and, provided the other requirements of the section are met, the cost of professional advice for these services is deductible under paragraph 40-880(1)(a) of the ITAA 1997.