Draft Taxation Determination

TD 2006/D12

Income tax: will a balancing adjustment amount arise under section 40-285 of the Income Tax Assessment Act 1997 if a balancing adjustment event, such as a sale, occurs for a depreciating asset before the taxpayer uses the asset, or has it installed ready for use, for any purpose?

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FOI status:

draft only - for comment

1. Yes, provided the taxpayer would have worked out the depreciating asset's decline in value under Subdivision 40-B of the Income Tax Assessment Act 1997 if the taxpayer had used the asset.^[1]

Example

2. You purchase a depreciating asset for $5,000 to be used, or to be installed ready for use, exclusively in your business that is carried on to produce assessable income. You would have worked out the asset's decline in value under Subdivision 40-B had you used the asset. However, you never use the asset, or have it installed ready for use, for any purpose, but instead sell the asset for $6, 000. The sale is a balancing adjustment event. The termination value of the asset was $6,000, being the amount which was received for the asset at the time of sale. The adjustable value in this case is the cost of the asset, namely $5,000, and the balancing adjustment amount is the difference between the adjustable value and the termination value, namely $1000, which would be included in your assessable income for the income year in which the balancing adjustment event occurred. Similarly, if the asset was sold for $4,000, a deduction of $1,000 would be allowable for the income year in which the balancing adjustment event occurred.

Date of effect

3. When the final Determination is issued, it is proposed to apply both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Commissioner of Taxation
1 March 2006

Appendix 1 - Explanation

Explanation

4. A balancing adjustment amount arises under section 40-285 if a balancing adjustment event^[2] occurs for a depreciating asset the taxpayer held and:

•

whose decline in value the taxpayer worked out under Subdivision 40-B; or

•

whose decline in value the taxpayer would have worked out under that Subdivision if the taxpayer had used the asset.

5. Common examples where the taxpayer would not have worked out the depreciating asset's decline in value under Subdivision 40-B if the taxpayer had used the asset include:

•

if it is an asset to which Division 40 does not apply;^[3] or

•

if the taxpayer could not work out a decline in value for the asset under Subdivision 40-B because another Subdivision of Division 40 applies.^[4]

6. A balancing adjustment amount is included in the taxpayer's assessable income to the extent that the asset's termination value^[5] is more than its adjustable value^[6] just before the balancing adjustment event occurred.^[7] A balancing adjustment amount is allowed as a deduction to the extent that the asset's termination value is less than its adjustable value just before the balancing adjustment event occurred.^[8] This amount is included in assessable income or deducted for the income year in which the balancing adjustment event occurred.

7. Subsection 40-290(1) reduces the balancing adjustment amount worked out under section 40-285 if the taxpayer's deductions for the decline in value of the depreciating asset have been reduced under section 40-25. Subsection 40-25(2), with the exception of low-value pools and certain cars, reduces the deduction for the decline in value of a depreciating asset to the extent that the asset is used, or installed ready for use, for a purpose other than a taxable purpose.

8. Where the taxpayer has not used the asset, or had it installed ready for use, for any purpose, there can be no reduction under subsection 40-25(2). Accordingly, in that situation subsection 40-290(1) would not reduce the amount to be included in the taxpayer's assessable income under subsection 40-285(1) or reduce the amount of the taxpayer's deduction under subsection 40-285(2).

Appendix 2 - Your comments

18. We invite you to comment on this draft Taxation Determination. Please forward your comments to the contact officer by the due date. (Note: The Tax Office prepares a compendium of comments for the consideration of the relevant Rulings Panel. The Tax Office may use a sanitised version (names and identifying information removed) of the compendium in providing its responses to persons providing comments. Please advise if you do not want your comments included in a sanitised compendium.)

Not previously issued as a draft

References

ATO references:
NO 2006/2480

Related Rulings/Determinations:

TR 92/20

Subject References:
adjustable value
assessable balancing adjustment amount
balancing adjustment deduction
balancing adjustment event
capital allowances
taxable purpose
termination value

Legislative References:
ITAA 1997 Div 40
ITAA 1997 Subdiv 40-B
ITAA 1997 40-25
ITAA 1997 40-25(2)
ITAA 1997 40-30
ITAA 1997 40-45
ITAA 1997 40-50
ITAA 1997 40-85(1)(a)
ITAA 1997 40-285
ITAA 1997 40-285(1)
ITAA 1997 40-285(2)
ITAA 1997 40-290(1)
ITAA 1997 40-295
ITAA 1997 40-300
ITAA 1997 40-305
ITAA 1997 40-310
ITAA 1997 40-315
ITAA 1997 40-320
ITAA 1997 40-325