Issue
Can the taxpayer claim a deduction under paragraph 40-880(1)(g) of the Income Tax Assessment Act 1997 (ITAA 1997) for the capital payment they made to the Administrator under the Deed of Company Arrangement (DCA)?
Decision
No. The taxpayer is not entitled to a deduction under paragraph 40-880(1)(g) of the ITAA 1997 because the business being stopped is not the business of the taxpayer.
Facts
The taxpayer was a director of a private company. The company traded until Receivers of the assets were appointed to the company by its secured creditor. On the same day the company was placed in voluntary administration pursuant to a resolution of the company's Directors.
The assets of the company were sold by the Receivers and the proceeds of the sales went to the secured creditor.
After the company was placed in voluntary administration, the company and its creditors executed a DCA and the Administrator of the company was appointed as the Deed Administrator. The DCA, among other things, provided for the same moratorium as section 444E of the Corporations Act 2001.
Under the terms of the DCA the taxpayer was required to pay, in their capacity as a Director of the company, a certain amount to the Administrator. Application of all of the funds collected by the Administrator was governed by the DCA. The amount paid by the taxpayer, in addition to other funds collected by the Administrator, was used to pay the Administrator's fee and the creditors.
Before the execution of the DCA the Administrator did nothing more than meet with the company's creditors because the company was then controlled by the Receivers. After the DCA was executed the Administrator recovered money from the company's debtors and paid dividends to creditors as required by the DCA.
After the DCA was executed the Deed Administrator resigned following the finalisation of all matters with respect to the DCA. At that time responsibility and control of the company was reinstated to the directors of the company. The company remained in existence after the finalisation of the DCA.
Reasons for Decision
Subject to other requirements of section 40-880 of the ITAA 1997, a deduction under paragraph 40-880(1)(g) is available to a taxpayer only if the taxpayer incurs capital expenditure that is a cost to stop carrying on the business of the taxpayer.
Amendments were made to paragraph 40-880(1)(g) of the ITAA 1997 by Taxation Laws Amendment Act (No. 5) 2002, with effect from 1 July 2001, to ensure it operates as intended. The amendment replaced the term 'a business' in the original provision with 'your business' to clarify that only costs incurred by a taxpayer to stop carrying on their business come within this provision.
Under the Corporations Law, a director of a company is an officer of the company who is responsible for managing the business of the company. As a company is a separate legal entity, the business of a company is not the business of a director of the company.
The taxpayer was required to pay the amount under the DCA pursuant to their capacity as a Director of the company. As the business of the company is not the business of the taxpayer, the payment was not a cost to stop carrying on the taxpayer's business, and is not deductible to the taxpayer under paragraph 40-880(1)(g) of the ITAA 1997.