Issue
Is the capital expenditure incurred by the partners of an existing partnership to obtain legal advice in relation to a technical dissolution and reconstitution of the partnership 'costs to stop carrying on your business' for the purpose of paragraph 40-880(1)(g) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The legal expenses incurred by the partners are costs to stop carrying on the business of the existing partnership for the purpose of paragraph 40-880(1)(g) of the ITAA 1997.
Facts
Partnership ABCDE carried on a business for a taxable purpose. The partnership originally had five partners, A, B, C, D and E. In the 2002-03 income year, partners A, B, C and D made a determination under the partnership agreement which resulted in partner E exiting the partnership. Partners A, B, C and D acquired the interest of exiting partner E in the partnership. The exit of partner E from the partnership resulted in a technical dissolution of partnership ABCDE. Partners A, B, C and D continued to carry on the business as reconstituted partnership ABCD.
The partners of partnership ABCDE incurred legal expenses to obtain legal advice to achieve the exit of partner E and on the technical dissolution of the partnership.
Reasons for Decision
Subject to the exclusions in subsection 40-880(3) of the ITAA 1997, paragraph 40-880(1)(g) of the ITAA 1997 provides a deduction for capital expenditure incurred by a taxpayer to stop carrying on their business.
The exit of partner E from partnership ABCDE constituted a change in membership of the partnership and, as a result, a technical dissolution of the partnership occurred. Partnership ABCDE ceased carrying on its business at that time. When the remaining partners acquired partner E's fractional interest in the partnership, partnership ABCD was formed. The former partnership's business was then operated by the reconstituted partnership.
The exit of partner E from partnership ABCDE was an integral element in the technical dissolution of the partnership and occurred contemporaneously with its cessation.
The legal expenses incurred by the partners of partnership ABCDE were integral to achieving the exit of partner E and the technical dissolution of the partnership and are costs to stop carrying on the business of the former partnership for the purpose of paragraph 40-880(1)(g) of the ITAA 1997.