ATO Interpretative Decision
ATO ID 2009/70 (Withdrawn)
Capital Allowances: business related costs - settlement payment - in relation to your business
FOI status: may be released
||This ATO ID is withdrawn as it is considered to be a simple restatement of the law. Guidance on this issue is now contained in Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues.
||This document has changed over time. View its history.
Status of this decision: Decision withdrawn 22 September 2017.
|CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.|
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Was the capital expenditure incurred by the taxpayer on a settlement payment incurred 'in relation to your business' for the purpose of paragraph 40-880(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. The capital expenditure the taxpayer incurred on a settlement payment was incurred 'in relation to your business' for the purpose of paragraph 40-880(2)(a) of the ITAA 1997, because there was a sufficient and relevant connection between the taxpayer's incurrence of the expenditure and their business.
The taxpayer entered into a contract with another company (the plaintiff) to distribute, promote and market its product.
Some years later the plaintiff took legal action against the taxpayer, alleging that the taxpayer caused the plaintiff loss and damage by breaching the terms of the contract. It was alleged the taxpayer failed to use reasonable endeavours to promote and extend sales of the plaintiff's product and made misrepresentations about their sales and distribution channels.
The taxpayer and the plaintiff entered into a Deed of Release in relation to the claims. The taxpayer incurred capital expenditure on a settlement payment to finalise all of the claims.
Reasons for Decision
Subject to the limitations and exceptions contained in subsections 40-880(3) to 40-880(9) of the ITAA 1997, subsection 40-880(2) of the ITAA 1997 provides that you can deduct, in equal proportions over a period of five income years starting in the year in which you incur it, capital expenditure you incur:
- in relation to your business, or
- in relation to a business that used to be carried on, or
- in relation to a business proposed to be carried on, or
- to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business.
In considering the phrase 'in relation to' contained within subsection 40-880(2) of the ITAA 1997, paragraph 2.25 of the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (the EM) states:
The provision is concerned with expenditure that has the character of a business expense because it is relevantly related to the business. The concept used to establish this character or requisite relationship between the expenditure incurred by the taxpayer and the business carried on (current, past or prospective) is 'in relation to'. The connector 'in relation to' allows the appropriate latitude to enable the deductibility of qualifying capital expenditure incurred before the business commences or after it has ceased.
The phrase 'in relation to' was considered by the High Court in PMT Partners Pty Ltd (In Liquidation) v. Australian National Parks & Wildlife Service (1995) 184 CLR 301. Brennan CJ, Gaudron and McHugh JJ observed, in considering the application of the Commercial Arbitration Act 1985 (NT), at 313:
Inevitably, the closeness of the relation required by the expression 'in or in relation to' in s 48 of the Act, indeed, in any instrument - must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears.
In that case Toohey and Gummow JJ also observed:
It is apparent that the words 'in or in relation to' are particularly wide. ... Cases concerning the interpretation of this phrase in other statutory contexts are of limited assistance. However, the cases do show that the words are prima facie broad and designed to catch things which have sufficient nexus to the subject. The question of sufficiency of nexus is, of course, dependent on the statutory context. (at 330) ...
The connection which is required by the phrase 'in relation to' is a question of degree. There must be some 'association' which is 'relevant' or 'appropriate'. The question of the relevance or appropriateness of the connection is a question which cannot be divorced from the particular statutory context. (at 331)
In First Provincial Building Society Limited v. Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207, Hill J. considered the phrase 'in relation to' within the context of paragraph 26(g) of the Income Tax Assessment Act 1936 . He considered the words 'in relation to' in that context included a relationship that may either be direct or indirect, provided that the relationship consisted of a real connection, but that a merely remote relationship is insufficient.
It is therefore necessary to consider the legislative context of subsection 40-880(2) of the ITAA 1997 in order to determine whether there is a sufficient and relevant connection between the expenditure incurred and the taxpayer's business. In discussing the types of business capital expenditure to which subsection 40-880(2) of the ITAA 1997 applies, the EM states:
Expenditure on the structure by which an entity carries on (or used to or proposes to carry on) their business and on the profit yielding structure of the business would ordinarily be expected to be of a capital nature. Capital expenditure can also relate to a business's trading operations or the entity that will carry on the business.
The structure covers the legal entity (such as a company) or the legal relationship (such as a partnership or trust) that is the entity that carries on the business for a taxable purpose and that holds the business assets.
These paragraphs indicate that capital expenditure incurred on the structure by which an entity carries on (or used to or proposes to carry on) their business, on the profit yielding structure of the business, or relating to the business's trading operations, are capable of being described as capital expenditure incurred 'in relation to' that business for the purposes of subsection 40-880(2) of the ITAA 1997. Whether such capital expenditure is incurred 'in relation to' the particular business will depend on whether there is a sufficient and relevant connection between the incurring of the expenditure and that business on the facts of the particular case.
In this case, the taxpayer incurred capital expenditure on a settlement payment to finalise all of the claims between the parties to the Deed of Release.
The plaintiff alleged that the taxpayer had caused the plaintiff loss and damage. It was alleged that the taxpayer failed to use reasonable endeavours to promote and extend sales of the plaintiff's product and made misrepresentations about their sales and distribution channels. The capital expenditure bears the character of expenditure incurred in relation to the trading operations of the taxpayer.
In these circumstances, there is a sufficient and relevant connection between the taxpayer's incurrence of the capital expenditure on the settlement payment and the business the taxpayer carries on. Accordingly, the expenditure the taxpayer incurred on the settlement payment is capital expenditure the taxpayer incurred in relation to its business for the purposes of paragraph 40-880(2)(a) of the ITAA 1997.
Date of decision: 17 July 2009
|Year of income:||Year ended 30 June 2007|
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
First Provincial Building Society Limited v. Commissioner of Taxation
(1995) 56 FCR 320
95 ATC 4145
(1995) 30 ATR 207
PMT Partners Pty Ltd (In Liquidation) v. Australian National Parks & Wildlife Service
(1995) 184 CLR 301
Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No.1) Bill 2006
Capital Allowances CoE
Siebel/TDMS Reference Number: 6144064; 1-5VXKC9A
Business Line: Private Groups and High Wealth Individuals
Date of publication: 24 July 2009
Date reviewed: 20 October 2014