Issue
Is the expenditure incurred by the taxpayer 'expenditure to convert your business structure to a different structure' for the purpose of paragraph 40-880(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The expenditure incurred by the taxpayer is not 'expenditure to convert your business structure to a different structure' for the purpose of paragraph 40-880(1)(b) of the ITAA 1997 because it was not expenditure for the requisite purpose of converting the taxpayer's business structure to a different structure.
Facts
The taxpayer carried on business for a taxable purpose. Transactions purporting to transfer ownership and control of shares in and assets of the taxpayer to other entities were entered into without the knowledge or consent of the taxpayer's shareholders.
The taxpayer initiated legal proceedings to remedy the purported effect of these unauthorised transactions. The transactions were declared void and of no legal effect. The taxpayer incurred expenditure on legal and other professional costs for the legal action.
Reasons for Decision
Subject to certain requirements and exclusions, section 40-880 of the ITAA 1997 provides a deduction for certain types of business related capital expenditure incurred after 30 June 2001. One of these types of expenditure described in section 40-880(1) of the ITAA 1997 is expenditure you incur that is to convert your business structure to a different structure, to the extent your business is carried on for a taxable purpose.
The requirement in paragraph 40-880(1)(b) of the ITAA 1997 that the capital expenditure be 'to convert' is satisfied if the expenditure is incurred directly for the purpose of and as an integral part of the process of converting your business structure to a different structure.
The costs the taxpayer incurred all related to the legal case instituted against the persons that entered into the unauthorised transactions. The purpose of the expenditure was to remedy the mischief resulting from the actions of those persons. The legal and other professional fees incurred for this purpose are not capital expenditure directly, actively and immediately necessary for a conversion to a different structure through which the taxpayer will carry on its business for a taxable purpose.
The expenditure is, therefore, not 'expenditure to convert your business structure to a different structure' for the purpose of paragraph 40-880(1)(b) of the ITAA 1997.