ATO Interpretative Decision
ATO ID 2004/475
Income Tax
Assessable recoupment: depreciating assets - compensation for estimated loss in valueFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is an amount the taxpayer received as compensation for the estimated loss in value of some of their depreciating assets an assessable recoupment under subsection 20-20(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The amount the taxpayer received as compensation for the estimated loss in value of some of their depreciating assets is not an assessable recoupment under subsection 20-20(3) of the ITAA 1997 because the amount is not a recoupment of a loss or outgoing the taxpayer incurred.
Facts
As part of an industry structural adjustment program, the taxpayer agreed to cease carrying on a part of their business activity from the time of the agreement. For this agreement, the taxpayer was awarded compensation. The amount awarded was paid, amongst other things, for the estimated loss in value of some of the taxpayer's depreciating assets (such as machinery and other equipment). The estimated loss in value was assessed by the payer of the compensation and was calculated as the difference between the value of the assets within a going concern and the salvage or auction value of the assets as a consequence of ceasing that part of the business in which the assets were employed. Even though the taxpayer ceased to carry on a part of their business, they did not dispose of the assets but continued to use them in other parts of their business.
Reasons for Decision
Broadly speaking, Subdivision 20-A of the ITAA 1997 includes an amount in your assessable income if you receive the amount as an assessable recoupment. More particularly, subsection 20-20(3) of the ITAA 1997 provides that an amount is an assessable recoupment if:
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- you receive the amount as recoupment of a loss or outgoing and
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- you have deducted or can deduct an amount for the loss or outgoing.
Subsection 20-25(1) of the ITAA 1997 generally defines recoupment of a loss or outgoing to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery (however described) and a grant in respect of the loss or outgoing.
The amount you have deducted or can deduct for the loss or outgoing must be under a provision listed in the table in subsection 20-30(1) of the ITAA 1997. Division 40 of the ITAA 1997, which provides capital allowance deductions for depreciating assets, is one of the provisions listed in subsection 20-30(1).
If the amount received is not a recoupment of a loss or outgoing within the meaning of that term in subsection 20-25(1) of the ITAA 1997 or if an amount for the loss or outgoing is not deductible under a provision listed in subsection 20-30(1) of the ITAA 1997, the amount received is not an assessable recoupment under subsection 20-20(3) of the ITAA 1997.
Despite the compensation payment in this case, the taxpayer did not dispose of their depreciating assets. In fact, the taxpayer retained and continued to use the assets which continued to decline in value within the capital allowance provisions of Division 40 of the ITAA 1997.
The amount received by the taxpayer as compensation was paid for the estimated loss in value of the depreciating assets the payer of the compensation considered to be surplus to the taxpayer's requirements as a consequence of the taxpayer's agreement to cease carrying on a part of their business. The payment was not made in respect of any outgoing the taxpayer may have incurred on the assets such as their purchase cost. Accordingly, the amount received was not paid for an existent loss or outgoing for any of the taxpayer's assets. The amount received was not a recoupment of a loss or outgoing. The amount was compensation paid to assist a business exit plan.
Therefore, the amount received by the taxpayer is not an assessable recoupment under subsection 20-20(3) of the ITAA 1997.
Date of decision: 6 May 2004Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 20-20(3)
subsection 20-25(1)
subsection 20-30(1)
Related Public Rulings (including Determinations)
Taxation Ruling TR 95/35
Keywords
Recouped expenses
Uniform capital allowances system
Depreciating assets
Deduction for depreciating assets
Capital Allowances CoE
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 6 May 2004 | Original statement |
| 15 September 2006 | Archived |