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Is the capital expenditure incurred by the taxpayer to formulate an alternative proposal to an existing takeover bid they had received, 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The capital expenditure incurred by the taxpayer to formulate an alternative proposal to an existing takeover bid they had received is 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the ITAA 1997 because it was incurred directly for the purpose of, and as an integral part of the process of, defending their business against a takeover.

The taxpayer, an entity that carried on business for a taxable purpose, was approached by an unrelated entity with a takeover proposal. The takeover proposal was an off-market takeover bid as referred to in section 616 of the Corporations Act 2001 (CA 2001).

The taxpayer's Board of Directors advised the taxpayer's members that they did not consider the entity's takeover bid to be in the member's best interests. The taxpayer incurred capital expenditure on fees for legal advice to formulate an alternative proposal to restructure the taxpayer, which was subsequently presented to their members. The takeover bid was not successful.

Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(d) provides a deduction for capital expenditure you incur to defend your business against a takeover, to the extent your business is carried on for a taxable purpose. For the paragraph to apply, there must be, at the least, the attempt of a takeover.

The word 'takeover' is not defined, but the example contained in paragraph 40-880(1)(d) of the ITAA 1997 states that expenditure incurred by a taxpayer in complying with subsections 633(1) or 635(1) of the CA 2001 is covered by the paragraph. These provisions of the CA 2001 relate to statutory obligations of a bidder and a target company when a takeover bid (including an off-market takeover bid) has been made by the bidder to the target company.

Paragraph 3.56 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.5) 2002 (TLAB No.5 (2002)) describes some types of expenditure incurred in defending a takeover under the CA 2001 that could come within paragraph 40-880(1)(d) of the ITAA 1997. It includes capital expenditure incurred on the preparation and issuing of Part B statements or Part D statements. These are statements (currently referred to as Target Statements) which the target company is required to prepare and send to their shareholders under subsection 633(1) of the CA 2001 (where an off-market bid has been made) or subsection 635(1) of the CA 2001 (where a market bid has been made).

The reference to the CA 2001 in both the example contained in paragraph 40-880(1)(d) of the ITAA 1997 and the Explanatory Memorandum to TLAB No.5 (2002) supports the view that the term 'takeover' in paragraph 40-880(1)(d) includes (but is not necessarily limited to) a takeover process within the context of the CA 2001. Accordingly, for the purpose of paragraph 40-880(1)(d), a takeover includes the processes listed under Chapter 6 of the CA 2001 in relation to entities covered by that Chapter. The entity's takeover bid was an attempted takeover of the taxpayer for the purposes of paragraph 40-880(1)(d).

The requirement in paragraph 40-880(1)(d) of the ITAA 1997 that the capital expenditure be incurred 'to defend' is satisfied if the expenditure is incurred directly for the purpose of, and as an integral part of, the process of defending your business against a takeover. The word 'defend' is not defined for the purpose of paragraph 40-880(1)(d) and, accordingly, takes its ordinary meaning relevant to the context in which it is used. The Australian Oxford Dictionary , 1999, Oxford University Press, Melbourne, defines 'defend' as 'to resist an attack made on; protect (a persona or thing) from harm or danger'.

The CA 2001 required the taxpayer's directors to act in the best interests of the taxpayer's members. The directors considered the entity's takeover bid was not in the best interests of the taxpayer's members, and incurred expenditure on legal advice to formulate an alternative proposal, in discharge of their corporate responsibilities. This capital expenditure was, therefore, incurred to defend or protect the taxpayer (and their members) against a takeover bid that was not in the best interests of the taxpayer (and their members). The expenditure was incurred directly for the purpose of, and as an integral part of, the process of defending the taxpayer's business against a takeover.

Paragraph 3.56 of the Explanatory Memorandum to TLAB No.5 (2002) includes legal costs as a type of expenditure that could fall within paragraph 40-880(1)(d) of the ITAA 1997. The taxpayer's expenditure is of that specific type.

Accordingly, the capital expenditure incurred by the taxpayer for legal advice to formulate an alternative proposal to an existing takeover bid they had received, was 'expenditure to defend your business against a takeover' for the purpose of paragraph 40-880(1)(d) of the ITAA 1997 because it was incurred directly for the purpose of, and as an integral part of the process of, defending the taxpayer's business against a takeover.