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Is an amount of capital expenditure incurred in establishing a business structure for an entity that predominantly derives investment income deductible under subsection 40-880(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. An amount of capital expenditure incurred in establishing a business structure for an entity that predominantly derives investment income is not deductible under subsection 40-880(1) of the ITAA 1997 because the entity would not generally be carrying on a business.

An entity derives its assessable income predominantly from investments. It incurs an amount of capital expenditure in establishing a structure to carry out its operations.

Subsection 40-880(1) of the ITAA 1997 provides that an entity can deduct an amount of capital expenditure incurred in establishing a business structure to the extent that the business is, was or will be carried on for a taxable purpose.

Generally, an entity such as a company, partnership or trust that predominantly derives investment income such as rental income, share dividends and interest income would not be carrying on a business because of the passive nature of such investments ( Cripps v. FC of T 99 ATC 2428; (1999) 43 ATR 1202).

Therefore, an entity that predominantly derives investment income would not satisfy the requirement in subsection 40-880(1) of the ITAA 1997 that the entity carries on a business for a taxable purpose.