Clough and s 40-880 expenditure

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In its recent decision in Clough Limited v Commissioner of Taxation [2021] FCA 108 (Clough), the Full Federal Court added to the long-running history of revenue versus capital cases by dismissing the taxpayer’s appeal and ruling that amounts incurred to cancel employee share rights and options were not deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). Although Clough is by no means a landmark case, the decision raises the importance of s 40-880 of the ITAA 1997 in allowing the gradual deduction of business-related costs which are not immediately deductible under s 8-1 of the ITAA 1997.

Summary of Clough


Clough Ltd (the Taxpayer) was the head entity of a tax consolidated group, specialising in engineering and construction and previously listed on the Australian Stock Exchange. Prior to the transactions that gave rise to the case, it was 60% owned by Murray & Roberts, a group based in South Africa.

Between 2012 and 2013, the Taxpayer and Murray & Roberts entered into discussions about the latter acquiring all the remaining shares in the Taxpayer. At this stage, both parties were concerned about how the employee share rights and options should be discharged and the appropriate tax treatment of these transactions.

The Taxpayer had two employee share schemes in place at the time:

  • Employee Option Plan — employees were given options which entitled them to subscribe for shares in the Taxpayer at a specified exercise price. The board of directors could determine that these options could vest immediately if they deemed that a ‘change in control’ event had occurred.
  • Employee Incentive Scheme — employees would be issued with performance rights after three years (or earlier if a ‘change of control’ event occurred). On vesting, each performance right entitled the employee to one share in the Taxpayer or cash equal to the market value of one share at the Taxpayer’s discretion.

In late 2013, the Taxpayer made offers to all participating employees to cancel the share options and rights under the above schemes. On 11 December 2013, one of the Taxpayer’s subsidiaries paid $15,050,487 in respect of these cancellations.


In a deemed assessment in respect of the 2013–14 income year, the costs of cancelling the share rights and options were treated as being non-deductible by the Commissioner of Taxation (the Commissioner).

Taxpayer’s argument

The Taxpayer objected to the Commissioner’s assessment, contending that these payments were deductible under both positive limbs of s 8-1(1) of the ITAA 1997. They argued that these payments satisfied both limbs of s 8-1(1) and were not precluded from deduction by the negative limbs under s 8-1(2).

In their view, the Employee Options Plan and Employee Incentive Scheme were intended to incentivise and reward senior employees for their performance and tenure. It followed that the payments to cancel the related share options and rights were incurred or necessarily incurred in the course of producing assessable income because they discharged the Taxpayer’s obligation to remunerate eligible employees under these schemes.

Commissioner’s argument

The Commissioner maintained that these payments were not deductible under s 8-1, dismissing the Taxpayer’s objection. In his view, the occasion of the cancellation payments was in the change of ownership structure and not the Taxpayer’s ordinary course of business. The Commissioner further contended that, as these outgoings were incurred as part of a capital restructure in preparation for a takeover of the Taxpayer, they were capital or capital in nature and therefore not deductible pursuant to s 8-1(2)(a).

This prompted the taxpayer to appeal this decision to the Federal Court.

Federal Court decision

The primary judge agreed with the Commissioner’s view that the payments were not deductible under the positive limbs of s 8-1(1), dismissing the Taxpayer’s appeal. The Taxpayer appealed this decision to the Full Federal Court.


The Full Federal Court unanimously upheld the primary judge’s decision, agreeing that the payments were not immediately deductible under s 8-1.

Get the full guide

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Included in the guide:

    • Subsection 8-1(1)(a): ‘incurred in gaining or producing assessable income’
    • Subsection 8-1(1)(b): ‘necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income’
    • Section 40-880 of the ITAA 1997: Blackhole expenditure
      • Brief overview of s 40-880
      • Application of s 40-880 in Clough
  • Relevance of the Clough decision
    • The role of s 40-880
      • Comparing s 8-1 and s 40-880
      • ATO views
      • Section 40-880 only covers capital expenditure
    • Expenses incurred in dealing with employees are not always deductible under s 8-1
  • Next steps

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