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1 Is the Expenditure incurred by the Company deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Question 2 If the answer to Question 1 is "No", is the Expenditure incurred by the Company deductible under section 40-880 of the ITAA 1997? Answer Yes. This private ruling applies for the following period: Year ended 30 June 202X Year ended 30 June 202Y Year ended 30 June 202Z The scheme commence on: 1 July 202X

The Group - Overview 1.  Prior to its liquidation, Original Head Company was incorporated in a foreign country. Original Head Company was a tax resident of Australia. 2.  Original Head Company was established to raise capital on foreign markets. 3.  Original Head Company held 100% of the shares of Subsidiary Company. 4.  Subsidiary Company is incorporated in Australia and a tax resident of Australia. 5.  Subsidiary Company carries on a business (the business) with operations primarily based in Australia. 6.  Subsidiary Company's business is carried on wholly for a taxable purpose. 7.  Prior to its liquidation, Original Head Company was the head company of the Tax Consolidated Group (TCG) that included Subsidiary Company as a subsidiary member (the TCG). 8.  Immediately prior to the acquisition of the shares in Original Head Company by the Company (see below), the shareholders of Original Head Company were Company A and two individuals (the Shareholders). Company A is an Australian incorporated company. 9.  The Shareholders are all Australian tax residents for income tax purposes. Events leading to restructuring of the Group

10.  Prior to the implementation of the transaction (as described below), the Directors of Original Head Company had received interest in acquiring the business from a listed entity. Initial high-level diligence was conducted. However, a sale did not eventuate due to the difficulties of executing a transaction given the shareholding interests held by foreign investors via foreign markets. 11.  The Directors were interested in a sale transaction as an opportunity to attract capital into the business to fund expansion and capital improvement plans, as well as providing for the realisation of the wealth held in the business by its founding shareholders (the two individuals). 12.  Subsequent to the failed sale process, the Directors sought to simplify the group structure to facilitate a transaction to attract the capital investment required from a third-party investor. 13.  The restructuring steps to facilitate the capital investment are summarised below and involved the acquisition of the foreign minority interests and the liquidation of Original Head Company. Acquisition of minority interests

14.  The first step in the group restructure was the acquisition of the shares held by the foreign investors in Original Head Company. This shareholding represented less than 50% of the total shares on issue. 15.  The shares held by the foreign investors were acquired by Company A via the transaction. The minority shareholders had their shares held in Original Head Company converted into the right to receive consideration from Company A. Following this share acquisition, the Group became wholly controlled by the founding shareholders. 16.  Company A was lent the consideration from Subsidiary Company. The only valuable asset of Company A immediately following the transaction was its shareholding in Original Head Company, which was offset by the loan owing to Subsidiary Company to fund the consideration. The Process 17.  The founding shareholders proposed to acquire all the shares of Original Head Company (not already owned by the two individuals for a specified price.

18.  Original Head Company's Board of Directors formed a special committee with independent directors to consider the proposal. The Special Committee hired its own independent advisors (including counsel as well as financial advisors) and negotiated with the founding shareholders to determine whether a transaction was feasible. The offer price was amended and upon review of valuations by independent experts and input from independent counsel, the Special Committee recommended the transaction proceed and that the agreement was fair to the unaffiliated minority shareholders. 19.  The consideration paid to the minority shareholders by Company A was treated as Company A's cost base in its shares in Original Head Company. The consideration is not part of the Expenditure. Legal Action 20.  Legislatively available legal action was taken by certain minority shareholders for assessment of whether the transaction was conducted at a fair price. This legal action was settled by Original Head Company for commercial expediency to prevent further disruption to the carrying on of the business. At that time, it was considered that no further legal costs or actions would arise.

21.  Separate to the first action, a shareholder class action was brought complaining of breach of fiduciary duties (the Class Action). 22.  The Class Action alleged that fiduciary duties owed to the shareholders were breached by conducting and consummating the transaction pursuant to an unfair process and at an unfair price. 23.  The defendants to the Class Action comprised: •                     A founding shareholder in their capacity as both a Director and CEO for alleged breach of fiduciary duties to the shareholders; •                     Controlling shareholders for alleged breach of fiduciary duties to the minority shareholders; and •                     Company A as the purchaser of the shareholdings from the minority shareholders for alleged unjust enrichment (together, the Defendants). 24.  Company A's involvement was limited to implementation of the transaction as the entity used by the controlling shareholders to acquire the minority shareholders shares.

25.  In their defence of the Class Action claim, the Defendants denied any, and all, allegations of wrongdoing, liability, violations of law or damages arising out of or related to any of the conduct, statements, acts, or omissions alleged in the Class Action, and maintained that their conduct was at all times proper, in the best interests of the group and shareholders and in compliance with applicable law. 26.  The Defendants further denied all counts alleged by the Class Action, any breach of fiduciary duties, and any unjust enrichment. The Defendants affirmatively asserted that the transaction was entirely fair to the company and its shareholders, and provided the company and its shareholders with substantial benefits. The Defendants also denied that the company or its shareholders were harmed by any conduct of the Defendants alleged in the Class Action or that could have been alleged.

27.  The parties to the Class Action engaged in discovery, including preparing, serving, and responding to requests for production of documents and interrogatories, serving subpoenas on third parties, and engaging in various written and oral communications concerning the scope of document production. This process was lengthy and time consuming. 28.  Eventually the action was settled at mediation resulted in the plaintiffs agreeing to settle and release all claims against all Defendants in return for a lump sum cash payment (the Settlement Amount), subject to the terms and conditions set forth in a settlement agreement (the Settlement). 29.  From the Defendant's perspective, the Settlement was reached to eliminate the uncertainty, risk, burden and expense of further litigation. 30.  The Class Action was settled, finally and forever, without any acknowledgement of the Defendants undertaking any wrongdoing, fault, liability, or damages. The Class Action spanned multiple years which resulted in significant disturbance to the day-to-day operations of the business.

31.  Removing the uncertainty around the current and possible future claims and litigation was a primary motivator for the Defendants to settle the Class Action. The settlement of which would allow management to focus on the business and pursue a future transaction to facilitate the injection of capital into the business. The Expenditure 32.  Various legal and other related fees were incurred by Subsidiary Company in relation to the legal actions taken (the Litigation Transaction Costs). 33.  In addition to the Litigation Transaction Costs, costs were also incurred by Subsidiary Company by payments of amounts to settle the legal actions (together, the Expenditure). 1.             The Expenditure was borne by Subsidiary Company on the basis that: •          It had the available cash flow to pay the Expenditure; and •          The Expenditure was incurred for the benefit of Subsidiary Company, namely that the restructuring of the shareholding of its parent entity would assist with future capital management, and the future liquidation of the parent entity would remove the unnecessary costs of maintaining a foreign entity. The Liquidation of Original Head Company

34.  The Company was incorporated in Australia. 35.  The Company acquired 100% of the shares in Original Head Company from the Shareholders in consideration of the issue of new shares in the Company in the same proportions to the shares held in Original Head Company. 36.  Original Head Company was liquidated. 37.  The Company made a choice under subsection 615-30(2) of the ITAA 1997 that the former TCG continued in existence with the Company as the new head company (the continuing TCG). 38.  The interposition of the Company and liquidation of Original Head Company was to enhance the ability of the shareholders to realise the value of their shareholding investment via a 3rd party sale (should they so desire). The sale of shares in a foreign incorporated company (for a business predominately based in Australia) would significantly restrict the pool of potential acquirers as compared to a sale of the shares in an Australian incorporated company. The liquidation of Original Head Company was considered to increase the attractiveness of the group to a 3rd party acquirer via the removal of the foreign company and associated regulatory and compliance requirements.

39.  The Commissioner of Taxation issued a private ruling confirming that Division 615 would automatically apply to defer any capital gain or capital loss realised by the Shareholders as a result of the acquisition of ordinary shares in the Company in consideration for the transfer of their shares in Original Head Company to the Company. Sale of the Company 40.  The founding shareholders received a Letter of Intent from a third party buyer (the Buyer) under which a period of exclusivity to undertake diligence was entered into. 41.  Following successful diligence enquiries, a sale structure was agreed under which an Australian entity set-up by the Buyer would acquire 100% of the shares in Company A, as well as the remaining shares held by both founding shareholders.

All legislative references are references to the Income Tax Assessment Act 1997 unless otherwise stated. Question 1 Is the Expenditure incurred by the Company deductible under section 8-1? Summary The Expenditure incurred by the Company is not deductible under section 8-1. Detailed reasoning Consolidated group 1.  Section 701-1 states that if an entity is a subsidiary member of a consolidated group, it's taken to be part of the head company for both head company core purposes and entity core purposes. Head company core purposes are working out the head company's tax liability or loss. Entity core purposes are working out the entity's tax liability or loss. 2.  As a consequence, the actions and transactions of the subsidiary members are imputed to the head company, with the head company of the group being the only entity recognised for income tax purposes. The meaning and application of the single entity rule is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. Application to your circumstances

3.  Under the single entity rule, the deductibility of the amounts paid by Subsidiary Company are analysed by reference to the actions and transactions of Subsidiary Company which are then imputed to the head company of the tax consolidated group together with the tax consequences. 4.  The Company acquired 100% of the shares in Original Head Company from the Shareholders in consideration of the issue of new shares in the Company in the same proportions to the shares in Original Head Company. The Company made a choice under subsection 615-30(2) that the former TCG continued in existence with the Company as the new head company (the continuing TCG): subsection 703-70(1). 5.  When the Company chooses to continue the consolidated group under subsection 615-30(2), it is treated as if it were the original company and the original company is treated as if it were the Company at all times before the interposition occurs. Under subsection 703-75(1), everything that happened in relation to the original head company before the time of the reorganisation is taken to have happened in relation to the new head company (the Company) instead of in relation to the original head company.

General deductions under section 8-1 6.  Subsection 8-1(1) provides that you can deduct from your assessable income any loss or outgoing to the extent that: (a)           it is incurred in gaining or producing your assessable income; or (b)           it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. (collectively referred to as "the positive limbs") 7.  However, subsection 8-1(2) prevents deductions for losses or outgoings to the extent that: (a)           it is a loss or outgoing of capital, or of a capital nature; or (b)           it is a loss or outgoing of a private or domestic nature; or (c)           it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d)           a provision of this Act prevents you from deducting it. (collectively referred to as "the negative limbs") The positive limbs 8.  For an outgoing to be deductible under the first positive limb in paragraph 8-1(1)(a), it must be incidental and relevant to the operations which produce your assessable income. [1]

It is both sufficient and necessary that the 'occasion' of the loss or outgoing should be found in whatever is productive of assessable income. [2] 9.  To identify the occasion of the outgoing, it is necessary to examine all relevant circumstances giving rise to it. It is relevant to consider what the outgoing was incurred to effect from a practical or business point of view. [3] 10.  To satisfy the second positive limb, a nexus must exist between the outgoing and a business carried on for the purpose of gaining or producing assessable income. Two things must be established: first, the expense was necessarily incurred in carrying on a business; and secondly, that the carrying on of the business was for the purposes of gaining or producing assessable income. For the expense to be incurred in the carrying on of the business, it must be part of the cost of trading operations. [4] 11.  The expense doesn't need to be unavoidable or essentially necessary. What is required is that the expenditure be appropriate or adapted for the ends of the business carried on. [5]

That is, it is reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business. [6] If the expense meets this definition, it will not be denied deductibility if it was not strictly necessary. [7] 12.  In Taxation Ruling IT 2656 Income tax: deductibility of takeover defence costs (IT 2656)the Commissioner considers the deductibility of takeover defence costs, including legal costs. Relevantly, the Commissioner expresses the following views: Deductions under the First Limb of Subsection 51(1)

12. In the view of this Office, there is no sufficient connection between takeover defence costs incurred by a target company and the derivation of assessable income from its income producing activities to be deductible under the first limb of subsection 51(1). The costs are not incidental or relevant to the operations or activities regularly carried on by the target company for the production of its assessable income. Nor could it be said that the occasion of these costs may be found in the activities of the target company which produce its assessable income. Examples of this type of expenditure would include costs incurred to solicit an alternative, more favourable, takeover bid and costs incurred to maintain an appropriate capital structure or to revalue assets to reduce vulnerability to takeover. These costs are not deductible under the first limb of subsection 51(1). Costs which may otherwise appear to be normal incidents of business would not be deductible if expended for the purpose of defending against a takeover. This would include advertising costs to renew market confidence and defend reputations. ... Deductions under the Second Limb of Subsection 51(1) ...

16. If a company incurs expenditure in defending an unwelcome takeover attempt to ensure that the rights of the company and its shareholders are not compromised (e.g. by ensuring that the shareholders are fully informed and obtain a fair and reasonable price for their shares), it does not incur an outgoing in carrying on the company's business. The expenditure may relate to the company's business and its assets and to the interests of its shareholders in the share capital of the company, but it owes nothing to the conduct of the company's business (compare Swan Brewery 91 ATC at 4644; 22 ATR at 303). Similarly, costs incurred in preparing Part B and Part D statements which recommend acceptance of takeovers are not deductible. Such costs are not incurred in the carrying on of the company's business. They are again concerned with the ownership of the shares in the company. Insufficient connection exists between the expenditure and the carrying on of the company's business to accept that the costs have the character of a working expense of the business or form part of the cost of the company's trading operations to produce income (Swan Brewery 91 ATC at 4644; 22 ATR at 303).

17. The Full Court of the Federal Court of Australia, in the course of their decision in Swan Brewery (91 ATC at 4644; 22 ATR at 303-4) made an observation to the effect that there may be some situations in which takeover defence costs would be deductible. They gave as an example the situation where the directors of a trading company may perceive a takeover as carrying an inherent threat to the continuation of the company's business and impairment of its income-earning activities, e.g. where the takeover can only lead to a reduction of circulating capital applied in the business and curtailment of the ability of the company's business to gain or produce assessable income. The court said that, in such a case, it may be argued that the costs in defending against a takeover are deductible (although they never finally determined the question) because the expenses would be aimed at maintaining the business activities of the company in the best interests of the shareholders and of the company and not simply directed at discharging the statutory duty of the directors to the shareholders. The Court cited the House of Lords decision in Morgan (Inspector of Taxes) v. Tate & Lyle Ltd [1955] AC 21 as supporting this view.

18. However, it is questionable whether any reliance may be placed in Australia on the decision in Tate & Lyle. In F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 CLR 431, Taylor and Webb JJ (although in the minority, they were the only judges to directly consider Tate & Lyle) cast considerable doubt on applicability of Tate & Lyle in Australia. Taylor J (see 99 CLR at 451) put the case of Tate & Lyle aside, saying that it "is of no assistance in applying the provisions of s 51(1)". While Webb J. pointed out the considerable difference between the relevant Australian and United Kingdom legislation (see 99 CLR at 440). A similar conclusion was reached by Menzies J in John Fairfax & Sons Pty. Ltd. v. F. C. of T. (1958-1959) 101 CLR 30 at 51, where his Honour stated that due to the differences in the legislation the fact that the decision in Tate & Lyle would allow a deduction does not mean that a deduction is allowable in Australia (see also the Privy Council's comments in Inland Revenue Commissioners v. Appuhamy [1963] 2 AC 127 at 134 that English authorities are not necessarily applicable to non-United Kingdom legislative rules).

19. Even if the reasoning in Tate & Lyle was to be applied in Australia, it is more than likely that it would be concluded that a deduction is not allowable. For, as Lord Reid observed([1955] AC at 55) "...the company's position is unchanged; it retains its assets and continues to carry on its business. All that happens is that the new shareholders can alter its policy; but a change of shareholders does not interest the company as a trader, and expenditure to prevent a change of shareholders can hardly be expenditure for the purposes of the trade" (see also Lord Morton of Henryton's comments at [1955] AC at 38). 20. Additionally, the Full Federal Court's observations are considered to be inconsistent with the trading operations test in John Fairfax and it is considered more appropriate to apply the test in John Fairfax. It is therefore considered that a deduction would not be allowable in the circumstances referred to in the Full Federal Court's decision in Swan Brewery.

21. The fact that the takeover defence costs are likely to take the form of legal or accountancy expenses or consultancy fees is not of itself significant in determining whether the costs are deductible under subsection 51(1).

22. With the exception of interest incurred on money borrowed in a reverse takeover to buy shares in the offeror company, takeover expenses of the type referred to in paragraph 3 are not deductible even when incurred in a reverse takeover situation. Such expenses can be distinguished from the reasoning used in Taxation Ruling IT 2606 which deals with "Deduction for Interest on Borrowings to fund Share Acquisitions". As was pointed out in that Ruling the taxpayer's purpose in incurring the expense may be relevant in determining the characterisation of the expenditure (see paragraphs 15 and 16 of IT 2606 and the cases referred to in those paragraphs). Interest expenses of the types referred to in IT 2606 are considered to be incurred for the purpose of carrying on the taxpayer's income producing business (paragraphs 18 and 19 of IT 2606). However, in the case of a reverse takeover the non-interest expenses are considered to be incurred not for the purpose of carrying on a business but rather for the purpose of preserving the capital structure of the company or its ownership. The expenditure cannot be characterised as an allowable deduction. ...

The first negative limb - capital, or of a capital nature 13.  Expenditure will not be deductible to the extent that it is "a loss or outgoing of capital, or of a capital nature" within the meaning of paragraph 8-1(2)(a). 14.  The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit and loss. [8] 15.  The following matters are relevant to considering whether expenditure is of a capital or revenue nature: (a)           the character of the advantage sought, and in this its lasting qualities may play a part (b)           the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c)           the means adopted to obtain it; that is, by providing a periodical reward or outlay... [9]

16.  What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view. [10] 17.  In IT 2656, the Commissioner expresses the following view with respect to takeover costs: 26. Expenses incurred in defending one's business against acquisition by another is considered to go either to the structure of the business (see, for example, Broken Hill Theatres Pty Ltd (1952) 85 CLR 423; and Pye v. F.C. of T. (1959) 33 ALJR 337) or to the ownership of the business structure. 27. Takeover defence costs incurred to protect or preserve the capital structure of a company or the ownership of the company are considered to be outgoings on the business entity, structure or organisation or its ownership and not deductible under subsection 51(1) of the Act. They are outgoings of capital or of a capital nature (see Swan Brewery 91 ATC at 4644; 22 ATR at 303 and F.C. of T. v. Consolidated Fertilizers Ltd. 91 ATC 4677 at 4688; (1991) 22 ATR 281 at 293). Legal expenses 18.  The nature or character of legal expenses is found in the advantage which is sought to be gained by incurring the expenses.

[11] This analysis is concerned with what the legal expenses were calculated to effect from a practical and business point of view, rather than a juristic classification of the legal rights, if any, secured, employed or exhausted in the process. [12] 19.  Legal expenses may be deductible if they arise out of the day to day activities of the taxpayer's business or income producing activity. [13] Where expenditure is devoted towards a structural rather than an operational purpose, the expenditure is of a capital nature and the expenses are not deductible. [14] Application to your circumstances

20.  In these circumstances, the outgoings paid by Subsidiary Company relate to defending the process by which, and the price at which, minority interests in Original Head Company were acquired by Company A and ultimately by the controlling shareholders, so that the group could be wholly privately owned. The acquisition of minority interests would facilitate restructuring of the group by enabling liquidation of the foreign entity thereby increasing the attractiveness of the group for sale to a third party buyer and the ease by which it could sold, enabling expansion of the business operations under new ownership.

21.  The proximate cause of the Expenditure was the transaction by which the minority shareholdings were acquired which carried with it a potential for legal action to be taken regarding the manner in which the directors and majority shareholders exercised their duties under the acquisition process. The transaction was of benefit to Subsidiary Company because the restructuring of the shareholding of its parent entity would assist with future capital management, and the future liquidation of its parent entity would remove the unnecessary costs of maintaining a foreign entity. The Expenditure was paid and borne by the Company as it had available funds. It was paid for the advantage of bringing litigation proceedings arising from the transaction to an end. In our view, the occasion for the Expenditure lay in the structural advantage sought to be obtained by the transaction and the object sought was to bring finality to that process so that the group could proceed with its further restructuring and capital objectives, including attracting capital investment into the group and realising wealth for its majority shareholders. The Expenditure can properly be characterised as relating to the ownership structure of the group, not its business operations.

22.  The Expenditure is not incidental or relevant to the operations or activities carried on by Subsidiary Company in the course of conducting its business operations that produce its assessable income. While the amounts paid relate to the company's business and the interests of its shareholders in the capital of the company, it owes nothing to the conduct of the company's business: F.C. of T. v. The Swan Brewery Co. Ltd [1991] FCA 360 23.  Furthermore, the Expenditure in this case relates to the business ownership structure and is properly characterised as outgoings of capital, or of a capital nature, and is excluded from deductibility under the first negative limb in subsection 8-1(2)(a). 24.  The Expenditure does not fall within the positive limbs of subsection 8-1(1) and was on capital account. Therefore, the Expenditure is not deductible under section 8-1. Question 2 If the answer to Question 1 is "No", is the Expenditure incurred by the Company deductible under section 40-880? Summary The Expenditure incurred by the Company is deductible under section 40-880. Detailed reasoning Section 40-880 - business related capital expenditure

25.  The object of section 40-880 is to allow certain business-related capital expenditure to be deductible if: (a)           the expenditure is not otherwise taken into account (b)           a deduction is not denied by some other provision; and (c)           the business is, was or is proposed to be carried on for a taxable purpose. Capital expenditure incurred in relation to your business 26.  Subsection 40-880(2) provides for deduction in equal proportions over a period of 5 income years if capital expenditure is incurred in relation to your business. 27.  The term 'capital expenditure' is not a defined term. Whether expenditure is capital in nature is determined on the facts of each particular case having regard to the principles established by case law. 28.  In TR 2011/6 [15] , the Commissioner states that the term 'in relation to' denotes the proximity required between the expenditure and the business, as guided in the following paragraphs:

72. The use of the expression 'in relation to' in subsection 40-880(2) rather than 'in carrying on' or the preposition 'on' to qualify the closeness of the required connection indicates that Parliament intended there to be greater latitude in the connection that needs to exist. ... 75. The words 'in relation to', whilst positing a test that is not as strict as 'in carrying on' however indicate that the expenditure in question is sufficiently relevant to the business to impress on it the character of a business expense of that business. 76. The legislation does not define the expression 'in relation to' and so it takes its ordinary meaning. The Macquarie Dictionary, 2005, 4th edition, The Macquarie Library Pty Ltd, NSW, defines 'related' as 'associated; connected'. Accordingly, the expenditure and the business need to be associated or connected for the expenditure to be described as being 'in relation to' the business. Although the phrase 'in relation to' uses wide words of connection, the intended width of the relationship between the two connected subjects must be considered against their legislative context. ...

78. The legislative context of section 40-880 indicates that the closeness of the association or connection must objectively support the conclusion that the expenditure is a business expense of the particular business. This is the same idea conveyed by the then Treasurer in media release no. 045 on 10 May 2005 that announced a systemic tax treatment for 'legitimate business expenses, known as blackhole expenditures.' The adjective 'legitimate' emphasises that the expenditure in question must be a genuine business expense of a particular business. 79. Whether capital expenditure is truly a business expense turns on the particular facts and circumstances and is a matter of impression and judgement. Determining whether the expenditure has the character of a business expense can be approached by asking what the expenditure is for, in the sense of identifying the need or object that the expenditure serves. If the facts show that the expenditure satisfies the ends of the relevant business then it will have the character of a business expense.

29.  Expenditure relating to the ownership of the entity carrying on the business is not business-related capital expenditure unless it can be demonstrated that the change of ownership serves an objective of the business. [16] 30.  TR 2011/6 provides the following examples of when capital expenditures relating to the ownership of the entity are in relation to the business: Example 6 85. Company B approaches Company A with a merger proposal. To evaluate the proposal Company A incurs capital expenditure on professional fees for legal, corporate and tax advice and for the performance of financial due diligence. The object of the expenditure is to determine the commercial merit of the proposal including the effect on the company's structure and its trading operations. The expenditure is in relation to Company A's business for the purpose of paragraph 40-880(2)(a). ... Example 8 88. XYZ Co carries on a medical research and supply business. The shareholders' involvement in the business includes providing medical expertise and services to the company. Because of other commitments one of the shareholders has been and will continue to be unable to devote resources to the business.

89. The directors of XYZ Co decide that in the interests of the business the ownership of the company should be restructured to replace the inactive shareholder with a private equity investor with the business acumen to push the company forward and inject capital for the purpose of future growth. 90. To facilitate the restructure XYZ Co paid $X00,000 to the shareholder as an incentive to agree to the sale of his shares to the equity investor. 91. The expenditure is capital expenditure of the company in relation to the business for the purpose of paragraph 40-880(2)(a). Application to your circumstances 31.  For the reasons given under Question 1, the Expenditure is capital expenditure. The Expenditure is in respect of the ownership structure of the group and was incurred to bring the legal proceedings related to the transaction to finality, the transaction being part of a broader restructuring to facilitate capital objectives.

32.  The Expenditure relates to the transaction that was entered to facilitate a change in the shareholding of Subsidiary Company's parent entity. It was considered that the future liquidation of the payment company would remove the unnecessary costs of maintaining a foreign entity and having the head of the group as an Australian company would facilitate future capital management, including the attracting capital investment into the group and realising wealth for its majority shareholders. The transaction carried with it risk of legal action regarding the manner in which the directors and majority shareholders exercised their duties under the acquisition process. These matters go to price of the shares in Original Head Company and the process by which the acquisition was undertaken. Therefore, whilst the Expenditure is not considered to be incurred 'in carrying on' a business for the purpose of gaining or producing assessable income, it is considered that the Expenditure serves an objective of the business and is made 'in relation to' its business for the purposes of subsection 40-880(2). Taxable purpose

33.  Subsection 40-880(3) provides that 'you can only deduct the expenditure, for a business that you carry on, used to carry on or propose to carry on, to the extent that the business is carried on, was carried on or is proposed to be carried on for a taxable purpose.' 34.  The definition of 'taxable purpose' is provided in subsection 40-25(7) to include the purpose of producing assessable income. 35.  The term 'purpose of producing assessable income' is further defined in subsection 995-1(1) as being: •                     for the purpose of gaining or producing assessable income; or •                     in carrying on a business for the purpose of gaining or producing assessable income. 36.  The Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 further explains:

2.47 A taxpayer whose business is not carried on for a taxable purpose cannot deduct expenditure to that extent. This limitation is not an annual test: that is, it is not to limit deductions to only the income years in which the business is carried on for a taxable purpose. The test as to the taxable purpose of the business is applied - as at the time the expenditure is incurred - to the taxable purpose of the business by reference to all known and predictable facts in all years. 37.  The application of subsection 40-880(3) requires that you determine, as at the time the capital expenditure was incurred, the extent to which your business will be carried on for a taxable purpose by reference to all known and predictable facts in all years.

38.  The legislation does not prescribe a particular methodology to determine the extent of the taxable purpose of the business. The 2006 Explanatory Memorandum is also silent as to how an apportionment under subsection 40-880(3) and paragraph 40-880(4)(a) is made. In the absence of a prescribed method of apportionment the Commissioner will accept an apportionment made on a fair and reasonable basis. As a general rule, the extent to which a business is, was or is proposed to be carried on for a taxable purpose is determined by comparing the amount of any exempt income and non-assessable non-exempt income the business has derived or will derive with total income (that is, assessable income plus exempt income plus non-assessable non-exempt income). This percentage is then applied to the amount of expenditure to reduce the deduction. Application to your circumstances 39.  Subsidiary Company was carrying on its business wholly for a taxable purpose. Therefore, subsection 40-880(3) will not apply to limit the deduction under section 40-880. Exceptions to allowing a deduction under subsection 40-880(5)

40.  Subsections 40-880(5) to (9) set out other limitations and exclusions to claiming a deduction under section 40-880. 41.  Of relevance, paragraph 40-880(5)(f) prevents a deduction under section 40-880 if the capital expenditure could be taken into account in calculating a capital gain or capital loss from a CGT event. Accordingly, expenditure included in the cost base (Subdivision 110-A) and reduced cost base (Subdivision 110-B) cannot be deducted under section 40-880 because such expenditure is taken into account in working out a capital gain or capital loss. Application to your circumstances 42.  The Expenditure was incurred by Subsidiary Company in connection with the transaction to restructure the ownership of the parent entity. In the present case, the Expenditure was borne by Subsidiary Company, and as such, the expenditure is not included in a cost base calculation for any other entity. The Expenditure cannot be taken into account in working out the amount of a capital gain or capital loss from any other identified CGT event. Therefore, paragraph 40-880(5)(f) does not prevent a deduction under section 40-880.

43.  On the facts of this case, none of the other exceptions contained in paragraphs 40-880(5)(a) to (e) and 40-880(5)(g) are of relevance in respect of the Expenditure. The other exclusions are not applicable in the present case, as follows: •                     The Expenditure does not form part of the cost of a depreciating asset that Subsidiary Company holds, used to hold or will hold: paragraph 40-880(5)(a). •                     Subsidiary Company cannot deduct an amount for it under a provision of this Act other than this section: paragraph 40-880(5)(b). •                     The Expenditure does not form part of the cost of land: paragraph 40-880(5)(c). •                     The Expenditure is not in relation to a lease or other legal or equitable right: paragraph 40-880(5)(d). [17] •                     The Expenditure would not be taken into account in working out a profit included in assessable income under section 6-5 or 15-15 or a loss that can be deducted under section 8-1 or 25-40: paragraph 40-880(5)(e). •                     No other provision would expressly make the expenditure non-deductible if it were not of a capital nature: paragraph 40-880(5)(g).

44.  There are no other limitations or exclusions under section 40-880 that would prevent a deduction of the expenditure. Conclusion 45.  The Company is entitled to deduct the Expenditure over a period of 5 income years in equal proportions, starting in the year in which it is incurred by Subsidiary Company under section 40-880. > [1] Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15. [2] Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15 at [15]. [3] Clough Limited v Commissioner of Taxation [2021] FCAFC 197 at [50]. [4] John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation [1959] HCA 4. [5] Clough Limited v Commissioner of Taxation [2021] FCAFC 197 at [57] referring to Spriggs v Commissioner of Taxation (2009) 239 CLR 1 at [75]; Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15at [10]. [6] Magna Alloys & Research Pty Ltd v Commissioner of Taxation [1980] FCA 150. [7] Clough Limited v Commissioner of Taxation [2021] FCAFC 197 at [62]. [8] Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73. [9] Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 73. [10]

Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34. [11] Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34. [12] Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634 at 648. [13] Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113. [14] Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403. [15] Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues. [16] TR 2011/6 at [84]. [17] TR 2011/6 at paragraphs 235 and 236 explain that the legislative context shows 'that paragraph 40-880(5)(d) relates to rights granted over the use of physical and intangible business assets. The rights to which paragraph 40-880(5)(d) is directed are those similar to leases in that they give the taxpayer a right to exploit the asset with which the right is associated.