Capital Allowances: business related costs - to establish a business structure

Is capital expenditure incurred by a company carrying on an existing business to obtain professional advice about modifying its existing constitution deductible under paragraph 40-880(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Capital expenditure incurred by the company to obtain professional advice about modifying its constitution is not deductible under paragraph 40-880(1)(a) of the ITAA 1997.

A company was incorporated to acquire and operate an existing business. After some months of operation, it was decided to modify the company's constitution to provide for a new class of shares that allowed passive investment in the company. The company incurred accounting and legal fees for advice about the process of modifying the constitution.

Broadly speaking, paragraph 40-880(1)(a) of the ITAA 1997 provides a deduction for capital expenditure to establish a 'business structure'. The term 'business structure' covers the legal entity (such as a company) or the legal relationship (such as a partnership or trust) that is established as the entity that will carry on the business for a taxable purpose and that will hold the business assets. Expenditure to incorporate a company, form a partnership or create a trust would generally satisfy this provision.

Incorporation of a company is achieved by registering it pursuant to the Corporations Act 2001 . Registration usually requires the lodgment of an application for registration and, where appropriate, a constitution with the Australian Securities and Investments Commission. This means that the company comes into existence or is established on the date it is registered.

Modifying the constitution of an existing company that is already carrying on a business does not establish the business structure for the purpose of paragraph 40-880(1)(a) of the ITAA 1997 because the business structure (the company) is already established. Capital expenditure to modify the constitution is therefore not deductible under paragraph 40-880(1)(a) of the ITAA 1997.

Depending on the nature and extent of the modifications, however, the capital cost of the modifications may be considered for deduction under paragraph 40-880(1)(b) of the ITAA 1997 if the modification had the effect of converting the existing business structure to a different business structure.