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Under subsection 40-880(1) of the Income Tax Assessment Act 1997 (ITAA 1997), can the taxpayer deduct the balance of previously undeducted expenditure for the year in which they stop carrying on the business?

No. Subsection 40-880(2) of the ITAA 1997 prescribes that a deduction under section 40-880(1) is allowed for each of five consecutive income years, irrespective of whether the business is carried on during those five years.

During the 2003-04 income year the taxpayer, the trustee of a deceased estate, incurred capital expenditure that was deductible as business related costs for the purposes of subsection 40-880(1) of the ITAA 1997. For that income year, the taxpayer deducted 20% of the expenditure incurred in accordance with subsection 40-880(2) of the ITAA 1997. The estate and its business were wound up during the 2004-05 income year.

Subsection 40-880(1) of the ITAA 1997 provides a deduction for capital expenditure incurred by a taxpayer that is one of the types of business related costs listed in that subsection (and that is not excluded from deduction under subsection 40-880(3)).

Under subsection 40-880(2) of the ITAA 1997, 20% of the expenditure is deductible for the income year in which it is incurred, and then 20% for each of the next four income years. No apportionment is necessary for expenditure incurred part way through the income year.

The taxpayer incurred the capital expenditure in the 2003-04 income year and deducted 20% of the expenditure amount from assessable income for that income year. The deduction allowable for any particular year does not necessarily depend on the business being carried on during the year of deduction. Subsection 40-880(1) recognises this by allowing a deduction to the extent that the business 'is, was or will be' carried on. There is no basis in section 40-880 to allow a deduction for greater than 20% of the expenditure for the 2004-05 income year.

Under subsection 40-880(1) of the ITAA 1997, a deduction for the balance of the expenditure continues to be available to the taxpayer who incurred the expenditure, at 20% per annum for the following three years of income (that is, 2005-06, 2006-07 and 2007-08), notwithstanding that no business or income-producing activities are subsequently carried on.