ATO Interpretative Decision
ATO ID 2002/1018 (Withdrawn)
Income Tax
Capital Allowances - CGT event K7FOI status: may be released
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This decision is withdrawn from 13 January 2003 and replaced by ATO ID 2003/5This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Issue
Does CGT event K7 happen under section 104-235 of the Income Tax Assessment Act 1997 (ITAA 1997) where a balancing adjustment event occurs for a depreciating asset upon the amalgamation of Club A and Club B, if the asset has been used to produce income that was not assessable income because of the principle of mutuality?
Decision
Yes. CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset that was held and while it was held the asset was used for a purpose other than a taxable purpose. The use of an asset to produce mutual income is use other than for a taxable purpose.
Facts
Club A and Club B are companies limited by guarantee and both are registered under the Registered Clubs Act 1976 (NSW).
Club A is amalgamating with Club B within the terms of paragraph 17A(1)(b) of the Registered Clubs Act 1976 (NSW) which states that a reference to the amalgamation of 2 or more registered clubs is a reference to an amalgamation effected by the continuation of one of those clubs and the dissolution of the other club or clubs.
As a result of the amalgamation Club A is to be dissolved and Club B is to take over its assets.
Club B had previously loaned an amount to Club A. The loan was secured by mortgage and made on condition that Club A would repay the loan within a period of 12 months or amalgamate with Club B. The loan was not repayable if the clubs amalgamated.
The members of both clubs voted at a general meeting to amalgamate.
Club A was placed in voluntary liquidation.
Reasons for Decision
Section 104-235 of the ITAA 1997 provides that CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset and at some time when the asset was held it had been used or installed ready for use for a purpose other than a taxable purpose.
The meaning of taxable purpose is set out in subsection 40-25(7) of the ITAA 1997 and includes the purpose of producing assessable income. As mutual income is not assessable income of Club A, the use of depreciating assets in relation to activities from which mutual income is derived is not use for a taxable purpose.
Where a balancing adjustment event occurs for such a depreciating asset a capital gain or loss arises to the extent of the non taxable use and is worked out under sections 104-240 (general case) or 104-245 (pooled assets) of the ITAA 1997.
Date of decision: 30 August 2002Year of income: Year ending 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 40-25(7)
section 104-235
section 104-240
section 104-245
Paragraph 17A(1)(b) Related ATO Interpretative Decisions
ATO ID 2003/5
ATO ID 2002/16
ATO ID 2002/17
Keywords
Capital gains tax
Balancing adjustment event
Depreciating assets
CGT events
Taxable purpose
ISSN: 1445-2782
| Date: | Version: | |
| 30 August 2002 | Original statement | |
| You are here | 13 January 2003 | Archived |