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Is the capital expenditure incurred by a taxpayer costs 'to stop carrying on' their business for the purposes of paragraph 40-880(1)(g) of the Income Tax Assessment Act 1997 (ITAA 1997) even though the business ultimately did not stop being carried on by the taxpayer?

Yes. The capital expenditure incurred by the taxpayer is costs 'to stop carrying on' their business for the purposes of paragraph 40-880(1)(g) of the ITAA 1997. Even though the business ultimately did not stop being carried on, the costs were directed and integral to the taxpayer stopping carrying on their business.

The taxpayer carried on a business for a taxable purpose. The taxpayer decided to sell the business to another entity under an arm's length arrangement. The taxpayer undertook the process of selling the business. In doing so, the taxpayer incurred legal, accounting and inventory valuation costs that were necessary in commencing and carrying out the sale process.

Ultimately, the prospective purchaser was unable to raise sufficient funds to finance the purchase with the result that the contract of sale was not executed. The taxpayer could not find an alternative purchaser and continued carrying on the same business after the attempted sale was abandoned.

Paragraph 40-880(1)(g) of the ITAA 1997 applies to certain capital expenditure incurred by a taxpayer providing that expenditure is a cost 'to stop carrying on' their business.

Expenditure is incurred 'to stop carrying on' a taxpayer's business if it can be objectively determined through activities carried out by the taxpayer that the expenditure is incurred directly for the purpose of the taxpayer stopping carrying on their business. The meaning of the words 'stop carrying on your business' in paragraph 40-880(1)(g) of the ITAA 1997 includes the case where a business that has ceased to be carried on by a taxpayer because the taxpayer has sold that business. It necessarily follows that any costs that are objectively determined to be incurred directly for the purpose of selling a business will therefore be objectively determined to be incurred directly for the purpose of the taxpayer stopping carrying on their business.

The legal, accounting and inventory valuation costs were directed to selling the taxpayer's business and directly facilitated the sale process. The incurring of the expenditure, as part of the sale process, can objectively support that the purpose of incurring these costs was to sell the business. The failure of the purchaser to ultimately execute the contract of sale does not alter the fact that the taxpayer's costs were incurred for that purpose and were integral to selling the business. As these costs were incurred directly for the purpose of selling the business, they are costs incurred by the taxpayer 'to stop carrying on' their business within paragraph 40-880(1)(g) of the ITAA 1997.

Provided that the other requirements for deductibility under section 40-880 of the ITAA 1997 are met, the taxpayer can deduct 20% of the costs in the year they incur them and in each of the following four years.