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Is the capital expenditure the taxpayer incurred in determining whether to attempt to takeover an unrelated business entity 'costs to your business of unsuccessfully attempting a takeover' for the purpose of paragraph 40-880(1)(e) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Capital expenditure the taxpayer incurred in determining whether to attempt to takeover an unrelated business entity is not 'costs to your business of unsuccessfully attempting a takeover' for the purpose of paragraph 40-880(1)(e) of the ITAA 1997 because the expenditure was incurred before the taxpayer had commenced the process of attempting the takeover.

The taxpayer, a company that carried on business for a taxable purpose, incurred capital expenditure in engaging the services of a consultant and a solicitor to examine the prospective acquisition of another unrelated company. The examination was intended to provide sufficient information on which the taxpayer could decide whether to attempt to takeover the other company.

The taxpayer's Board of Directors subsequently formally approved the making of an offer for the purchase of all of the issued shares in the target company. Following that approval, the taxpayer incurred further capital expenditure on consultancy fees in negotiating a purchase price with the target company.

The taxpayer ultimately decided not to proceed with the acquisition of the company.

Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(e) provides a deduction for capital expenditure incurred by a business of unsuccessfully attempting a takeover, to the extent the business is carried on for a taxable purpose. This means that there must be, at the least, an attempt to takeover.

The word 'takeover' is not defined for the purposes of section 40-880 of the ITAA 1997 and, accordingly, takes its ordinary meaning relevant to the context in which it is used. The Australian Oxford Dictionary Australian Oxford Dictionary 1999, Oxford University Press, Melbourne, defines takeover as 'the assumption of control (especially of a business); the buying out of one company by another'. The taxpayer's attempted acquisition of all of the issued shares in the target company would have resulted in it assuming control of the company and is the attempt of a takeover for the purposes of paragraph 40-880(1)(e) of the ITAA 1997.

The requirement in paragraph 40-880(1)(e) of the ITAA 1997 that the capital expenditure be incurred attempting a takeover is satisfied where the expenditure is incurred directly for the purpose of, and as an integral part of the process of, attempting the takeover. The commencement of the attempted takeover in this case was objectively evidenced by the taxpayer's formal decision to authorise the making of an offer to acquire all of the issued shares in the target company. The takeover process commenced at the time that approval was given by the Board of Directors.

The expenditure incurred on the consultancy and legal fees in determining whether to attempt to takeover the target company was incurred before the takeover process was commenced. It was not, therefore, incurred directly for the purpose of, and as an integral part of, attempting the takeover. Note: The taxpayer also incurred expenditure on consultancy fees to negotiate a purchase price after the Board's approval to make a takeover offer. The expenditure was for services provided after the process of attempting a takeover began and were incurred directly for the purpose of and as an integral part of attempting the takeover which, it so happened, was subsequently unsuccessful. This capital expenditure does represent costs of unsuccessfully attempting a takeover under paragraph 40-880(1)(e) of the ITAA 1997.