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ATO Interpretative Decision

ATO ID 2002/619

Income Tax

Uniform Capital Allowances - Disposal of depreciating asset by a beneficiary of a deceased estate
FOI status: may be released

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Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.

Issue

What is the amount of the balancing adjustment under section 40-285 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of a beneficiary disposing of a depreciating asset inherited from a deceased estate?

Decision

The amount of the balancing adjustment worked out under section 40-285 of the ITAA 1997 is nil.

Facts

Mr A (a sole trader) purchased a depreciating asset costing $20,000 on 28 August 2001. The decline in value of the asset was worked out under Subdivision 40-B of the ITAA 1997. Mr A used the asset solely for the purpose of producing assessable income. Mr A died on 28 February 2002 and the asset passed to the legal personal representative. The legal personal representative passed the asset to a beneficiary of the deceased's estate. The market value of the asset at the time was $21,000. The beneficiary soon sold the asset for $21,000. Neither the LPR nor the beneficiary used the asset, or had it installed ready for use, for any purpose.

Reasons for Decision

The beneficiary ceased to hold the asset as a result of selling it. Accordingly, a balancing adjustment event occurred for the asset under paragraph 40-295(1)(a) of the ITAA 1997. Section 40-285 of the ITAA 1997 requires comparison of asset's termination value with its adjustable value just before the event occurred.

The beneficiary did not use the asset, or have it installed ready for use, for any purpose. Paragraph 40-85(1)(a) of the ITAA 1997 provides that the adjustable value of the depreciating asset in the hands of the beneficiary is its cost. The beneficiary acquired the asset from the legal personal representative. Item 13 of the first element cost table in subsection 40-180(2) of the ITAA 1997 specifies the cost to the beneficiary to be the asset's market value reduced by any capital gain in relation to the asset that was disregarded by the deceased or the legal personal representative under section 128-10 of the ITAA 1997 or subsection 128-15(3) of the ITAA 1997.

The deceased used the asset solely for the purposes of producing assessable income and the legal personal representative did not use the asset, or have it installed ready for use, for any purpose. Accordingly, CGT event K7 (section 104-235 of the ITAA 1997) did not happen to the asset at the time it left their hands respectively and so and there was no capital gain for either to disregard. Accordingly, the cost, and so adjustable value, of the depreciating asset to the beneficiary was its market value of $21,000. This is the same amount the asset was sold for by the beneficiary and so the amount of the balancing adjustment worked out under section 40-285 was nil.

There are no capital gains tax implications for the disposal of the asset by the beneficiary for the following reasons:

•
Subsection 118-24(1) of the ITAA 1997 provides that any capital gain or loss that you make from a CGT event, that is also a balancing adjustment event that happens to a depreciating asset you held, is to be disregarded if the decline in value of the asset was worked out under Division 40 of the ITAA 1997, or would have been worked out under that Division had you used it.
•
Subsection 118-24(2) of the ITAA 1997 provides exclusions to the rules in subsection 118-24(1), including where a taxpayer makes a capital gain or capital loss from CGT event K7 (section 104-235 of the ITAA 1997) happening.
•
CGT event K7 does not apply, as the beneficiary did not use the asset, or have it installed ready for use, for any purpose.
•
The other exclusions in subsection 118-24(2) of the ITAA 1997 also do not apply.

Notation:
This ATO ID has been amended by rewording the last two paragraphs in order to clarify the meaning.

Date of decision:  05 April 2002

Year of income:  30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   paragraph 40-85(1)(a)
   item 13, subsection 40-180(2)
   section 40-285
   paragraph 40-295(1)(a)
   item 1, subsection 40-305(1)
   section 104-235
   Subsection 118-24(1)
   section 128-10
   subsection 128-15(3)

Related ATO Interpretative Decisions
ATO ID 2002/617 ATO ID 2002/618

Keywords
Uniform capital allowances system
Balancing adjustment event
Termination value

Siebel/TDMS Reference Number:  DW367697

Business Line:  Small Business/Individual Taxpayers

Date of publication:  31 May 2002

ISSN: 1445-2782

history
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