Issue
Is the deduction under paragraph 40-880(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for capital expenditure incurred by a taxpayer to convert their business structure to a different structure reduced, if the taxpayer, within the converted structure, establishes a separate business structure through which a business is carried on for other than a taxable purpose?
Decision
Yes. Paragraph 40-880(1)(b) of the ITAA 1997 requires the deduction for capital expenditure incurred by the taxpayer to convert their business structure to a different structure to be reduced, because the taxpayer, within the converted business structure, established a separate business structure through which they conduct business activities that are not carried on for a taxable purpose.
Facts
The taxpayer entered into a merger arrangement with an unrelated company. For the purposes of paragraph 40-880(1)(b) of the ITAA 1997, this new legal relationship created the framework within which the taxpayer operates and represents the conversion of the taxpayer's business structure to another business structure. The taxpayer, through the new structure (Structure A), carries on business for a taxable purpose.
Following the conversion to Structure A, the taxpayer entered into a separate legal relationship with an unrelated entity to conduct certain other business activities. Entering into this other legal relationship established a separate business structure (Structure B) to Structure A. The establishment of Structure B was planned as part of the overall business that would be carried on through Structure A.
The business conducted through Structure B is not carried on for a taxable purpose.
Reasons for Decision
Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(b) provides a deduction for capital expenditure you incur to convert your business structure to a different structure, to the extent your business is, was or will be carried on for a taxable purpose.
For the purpose of section 40-880 of the ITAA 1997, 'your business structure' refers to the structure through which your business will be carried on. Generally speaking, this covers the legal entity or the legal relationship that constitutes the structure with which business will be carried on for a taxable purpose, and that will hold the business assets. In this sense, business structure is a system, mode, or arrangement of parts, elements or constituents, considered from the point of view of the whole rather than of any single part, that gives the form and organisation through which your business is conducted.
Hence, 'business structure' goes to such matters as how the entity acts, conducts business and uses their assets as an economic group. Indicators that a particular form of relationship or organisation represents 'your business structure' for the purposes of section 40-880 of the ITAA 1997 include that form of relationship containing features of ownership, control, profit distribution and liability and being recognised in corporations law or on the Australian Stock Exchange.
The establishment of Structure B followed the successful conversion to Structure A through the merger arrangement. Although Structure A and Structure B are separate business structures, the taxpayer's business carried on through Structure A encompasses the activities conducted through both business structures. It is, therefore, necessary to consider the taxpayer's business activities through both structures in determining the extent to which the taxpayer's business is being carried on for a taxable purpose.
The taxpayer is, therefore, required to reduce their deduction under paragraph 40-880(1)(b) of the ITAA 1997 for the capital expenditure they incurred to convert their business structure to another structure to the extent that the taxpayer's business, which includes that conducted through Structure B, is not carried on for a taxable purpose.