Issue
Is the expenditure incurred to raise funds through the issue of shares, expenditure to 'raise equity for your business' under paragraph 40-880(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) where the funds raised are used to buy-back shares of existing shareholders?
Decision
Yes. Expenditure incurred in issuing shares is to raise equity for your business for the purpose of paragraph 40-880(1)(c) of the ITAA 1997, even where the funds raised are used to buy-back shares from existing shareholders, as the management of share capital is 'part of the conduct of a business'.
Facts
The taxpayer incurred capital expenditure in issuing new shares in the business.
Necessary steps in the share issue included a share-split for existing shareholders prior to the issue of new shares and listing on the Australian Stock Exchange after the shares had been issued.
Substantial funds were raised from the share issue.
The share issue proceeds were used primarily to fund a buy-back of shares from existing shareholders. The remainder (less expenditure in holding the share issue) was retained as working capital resulting in an overall increase in equity within the business.
The issuing of new shares broadened the businesses shareholder base and provided exposure in new and current markets.
Reasons for Decision
Subject to other requirements of section 40-880 of the ITAA 1997, paragraph 40-880(1)(c) of the ITAA 1997 provides a deduction for capital expenditure incurred to raise equity for your business to the extent that the business is, was or will be carried on for a taxable purpose.
Section 40-880 of the ITAA 1997 and the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 and the Taxation Laws Amendment Act (No 5) 2002 provide some guidance to the meaning of 'to raise equity for your business'.
The Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 states that 'Paragraph 40-880(1)(c) generally only applies where there is a raising of equity capital by a company or a fixed unit trust through either a private or public issue of shares or a rights issue'.
The example for paragraph 40-880(1)(c) of the ITAA 1997 includes capital expenditure incurred in issuing new shares to fund business expansion, within this paragraph.
Increasing funds through issuing new shares is raising equity for the purpose of paragraph 40-880(1)(c) ITAA 1997.
Paragraph 40-880(1)(c) of the ITAA 1997 requires that the equity raised be 'for your business'. The paragraph does not require the tracing of funds to determine if they will be used to produce assessable income. However, it is necessary to consider the use of the funds to establish that the equity raised is 'for your business'.
In this case, the majority of the equity raised through the issuing of shares was used to fund the buy-back of shares from existing shareholders and the remainder (less share issue expenses) retained as working capital.
A necessary part of managing the business of a company includes the management of its share capital and share register. This is an important element in managing the cost of capital to the company and the ability to use its shares to fund acquisitions or business expansion. The share buy-back allowed some of the existing shareholders to sell their shares while maintaining stability in their register and a stable share price. It is considered that the use of the funds raised from the share issue to buy-back shares from existing shareholders was undertaken as a requirement of the business.
Accordingly, the expenditure incurred in issuing new shares is expenditure incurred to raise equity for your business.