Capital Allowances: business related costs - stamp duty incurred on acquiring a business

Is stamp duty incurred by the taxpayer on their acquisition of an existing business deductible under paragraph 40-880(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Stamp duty incurred by the taxpayer on their acquisition of an existing business is not deductible under paragraph 40-880(1)(a) of the ITAA 1997, because the stamp duty is not incurred to establish the business structure through which the business will be carried on.

The taxpayer acquired an existing business which was carried on by a sole trader. The business comprised goodwill and depreciating assets. The taxpayer incurred stamp duty in relation to the acquisition of the business. Under the relevant state law, the stamp duty was calculated on the price paid for the goodwill and the depreciating assets.

Paragraph 40-880(1)(a) of the ITAA 1997 provides a deduction for capital expenditure incurred by a taxpayer in establishing their '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.

In this case, the stamp duty was incurred on acquiring the existing business (or, more correctly, on the transfer of the goodwill and depreciating assets that comprised the business) and not on the structure through which the taxpayer proposed to carry on that business. A deduction under paragraph 40-880(1)(a) of the ITAA 1997 is, therefore, not available.

In any event, section 40-880 of the ITAA 1997 is a provision of last resort. That is, a deduction is not available under section 40-880 of the ITAA 1997 for expenditure that is recognised elsewhere in the income tax law. This is achieved through subsection 40-880(3) of the ITAA 1997 which denies a deduction for certain expenditure that is otherwise deductible under subsection 40-880(1) of the ITAA 1997 because it satisfies one of the types of expenditure described in subsection 40-880(1) of the ITAA 1997.

In particular, paragraph 40-880(3)(a) of the ITAA 1997 denies a deduction to the extent that the capital expenditure incurred forms part of the cost of a depreciating asset held. Part of the stamp duty was incurred for the transfer of the depreciating assets and represents part of the cost to hold them. That part of the stamp duty is, therefore, denied a deduction.

In addition, paragraph 40-880(3)(f) of the ITAA 1997 denies a deduction to the extent that the capital expenditure incurred would be taken into account in working out the amount of a capital gain or capital loss from a CGT event. Goodwill is a CGT asset. Part of the stamp duty was incurred for the transfer of the goodwill and represents an incidental cost of its cost base. That part of the stamp duty is, therefore, denied a deduction.