ATO Interpretative Decision
ATO ID 2003/5
Income Tax
Capital Allowances - CGT event K7FOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 receipts that were not income because of the principle of mutuality?
Decision
Yes. CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset held which, while held, was used or installed ready for use for a purpose other than a taxable purpose. Any capital gain on disposal is reduced to the extent of the use other than for a taxable purpose. To the extent an asset is used to produce mutual receipts, the use is 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).
The members of both clubs voted at a general meeting to amalgamate.
Under the amalgamation, Club A is to be dissolved and Club B is to continue and is to acquire Club A's assets.
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 two 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.
Club A has been 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 which, at some time when it was held, 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.
Receipts under the principle of mutuality do not constitute income and are not assessable. As a result, the use of depreciating assets in activities from which mutual receipts arise 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 section 104-240 (general case) or section 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 2002/1018
ATO ID 2002/1016
ATO ID 2002/1017
Keywords
Capital gains tax
Balancing adjustment event
Depreciating assets
CGT events
Taxable purpose
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 30 August 2002 | Original statement |
| 12 March 2010 | Archived |