Capital Allowances: Project Pool - feasibility studies

Is the taxpayer's expenditure an amount incurred for feasibility studies for the project within subparagraph 40-840(2)(d)(iii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. None of the expenditure is an amount incurred for feasibility studies for the project within subparagraph 40-840(2)(d)(iii) of the ITAA 1997.

The taxpayer sought to acquire an existing business of a particular type with the intention of operating it themself. After considering a number of businesses for sale, the taxpayer entered into a contract to acquire a particular business. Completion of the contract was subject to certain conditions. As a result of one of the conditions not being met, the taxpayer terminated the contract.

The taxpayer incurred solicitor's fees for advice about the contract, accountant's fees for liaison services between the contracting parties and a financial institution and fees for advice about the condition that ultimately failed the contract.

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 one of the amounts specified in paragraph 40-840(2)(d) of the ITAA 1997. Subparagraph 40-840(2)(d)(iii) of the ITAA 1997 specifies an amount incurred for feasibility studies for the project.

The term 'feasibility studies' is not defined for the purposes of the project pooling provisions of Subdivision 40-I of the ITAA 1997 and is not otherwise defined in the income tax law. The Macquarie Dictionary (Revised Third Edition) 2001 defines feasibility study as a survey or analysis of the need, value and practicability of a proposed enterprise. The Oxford Dictionary of Business (Third Edition) 2002 defines feasibility study as an investigation to determine which of a range of decisions is likely to give a satisfactory return in a financial appraisal or economic appraisal of the alternatives.

Broadly speaking then, a feasibility study may be described as a process to gather and analyse sufficient information to adequately consider technical, financial, economic or market viability factors in order to make an informed decision about the potential success of a proposed activity. A feasibility study may also have pre-determined criteria (such as level of investment, rate of return, operating costs) against which the viability of the activity is assessed.

To satisfy the requirement of subparagraph 40-840(2)(d)(iii) of the ITAA 1997, a feasibility study must directly address the project itself (including its constituent activities) and that project must be one that is or is proposed to be carried on for a taxable purpose. All of the expenditure incurred by the taxpayer, however, was directed to the acquisition of the business. The acquisition of a business is not, of itself, a project carried on for a taxable purpose even though a business that is acquired might be operated for that purpose.

Accordingly, the taxpayer's expenditure was not incurred for the purpose of establishing the feasibility of a project to be carried on for a taxable purpose and, therefore, does not satisfy the requirement contained in subparagraph 40-840(2)(d)(iii) of the ITAA 1997.