Capital Allowances: Project Pool - carry on a project for a taxable purpose

Do the taxpayer's activities in looking for an existing business to acquire amount to carrying on a project for a taxable purpose within paragraph 40-840(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Looking for an existing business to acquire is not, of itself, a project which is carried on for a taxable purpose within paragraph 40-840(2)(c) of the ITAA 1997.

The taxpayer was interested in acquiring and operating an existing business of a particular type. The taxpayer inspected a number of businesses in various locations and, in doing so, incurred expenditure on accommodation, air fares, car rental and parking.

Section 40-830 of the ITAA 1997 allows a deduction for project amounts allocated to a project pool over the life of the project. If a project is abandoned, sold or otherwise disposed of, a deduction is available for the balance of the undeducted pool amount for the year of disposal.

To be a project amount within the meaning of that term in subsection 40-840(2) of the ITAA 1997, the expenditure must, among other things, be directly connected with a project that is carried on or proposed to be carried on for a taxable purpose (paragraph 40-840(2)(c) of the ITAA 1997).

So far as is relevant here, taxable purpose means the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997). Something is done for the purpose of producing assessable income if it is done for the purpose of gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income (subsection 995-1(1) of the ITAA 1997).

For a project to be carried on for a taxable purpose the project itself (including the activities constituting the project) must not only be carried on for that purpose but must be capable of income production.

In the present case, it is accepted that the taxpayer had a genuine intention to acquire an existing business. It is also accepted that the taxpayer would carry on any business acquired for a taxable purpose. However, while the taxpayer's activities of looking for and inspecting existing businesses may be a project, they do not amount to a project that was carried on for a taxable purpose because, of themselves, the activities were not capable of income production. At best, the activities were directed to and may have ultimately led to the acquisition of an income producing business. Such activities are too remote and too general to amount to a project that is carried on for a taxable purpose.

Whether a business is acquired or not is not determinative of whether the activities of looking for one to acquire amount to a project that is carried on for a taxable purpose.