ATO Interpretative Decision

ATO ID 2004/259 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as section 40-315 of the Income Tax Assessment Act 1997 has been repealed. Expenses of a balancing adjustment event occurring for a depreciating asset that are incurred after 30 June 2005 and that are not otherwise deductible are dealt with in new paragraph 40-190(2)(b) of the Income Tax Assessment Act 1997.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

For the purpose of working out a balancing adjustment under section 40-285 of the Income Tax Assessment Act 1997 (ITAA 1997), is the termination value of the taxpayer's depreciating asset less than zero if the qualifying expenses of the asset's balancing adjustment event exceed the asset's termination value?

Decision

No. For the purpose of working out a balancing adjustment under section 40-285 of the ITAA 1997, the termination value of the taxpayer's depreciating asset is zero if the qualifying expenses of the balancing adjustment event exceed the termination value of the asset.

Facts

The taxpayer affixed to their land a new depreciating asset to replace an older model of the asset. The new asset was installed at a different site on the land to the old asset. The old asset continued to be used until the new one was fully operational. Once replaced, it was necessary for safety reasons to remove the old depreciating asset. Removing the old asset involved some dismantling by the taxpayer and some demolition by an external contractor. The taxpayer sold the parts it dismantled to a scrap dealer. The taxpayer paid a fee to the external contractor to demolish and dispose of the remaining part of the old asset. The fee paid to the external contractor exceeded the amount received from the scrap dealer. The cost of removing the old depreciating asset is capital expenditure and not deductible to the taxpayer under any provision of the ITAA 1997 outside Division 40 of the ITAA 1997.

Reasons for Decision

A balancing adjustment is required if a balancing adjustment event occurs for a depreciating asset whose decline in value is worked out under Subdivision 40-B of the ITAA 1997 (section 40-285 of the ITAA 1997). Broadly speaking, a balancing adjustment is the difference between the asset's termination value and its adjustable value and is either included in or allowed as a deduction from assessable income.

For the purpose of working out a balancing adjustment under section 40-285 of the ITAA 1997, the termination value of a depreciating asset has the meaning given by section 40-300 of the ITAA 1997. If an item in the table in subsection 40-300(2) of the ITAA 1997 applies, the termination value is the amount specified in that item. Otherwise, the termination value is the amount you are taken to have received under section 40-305 of the ITAA 1997.

The amount worked out as the termination value of a depreciating asset may be reduced, under section 40-315 of the ITAA 1997, for expenses that are reasonably attributable to the balancing adjustment event occurring for the asset if they are not otherwise deductible. The fee paid to the external contractor in this case satisfies these requirements.

As no item in the table in subsection 40-300(2) of the ITAA 1997 applies, the termination value of the taxpayer's depreciating asset is the amount worked out under section 40-305 of the ITAA 1997. Section 40-305 applies to treat certain amounts as having been received under a balancing adjustment event. The word 'amount' of itself connotes a sum total to which items amount up (see EMI (Aust) Ltd v. FC of T 71 ATC 4112; (1971) 2 ATR 325). In the context of section 40-305, what is sought as the 'amount' is a quantitative statement of what the buyer promises, expressly or tacitly, to pay to, or for, the seller in order that he, the buyer, may get a good title to goods that he has agreed to buy (again see EMI (Aust) Ltd v. FC of T 71 ATC 4112; (1971) 2 ATR 325). In an ordinary sense, an amount less than zero is not received. This is supported by the definition of the word 'amount' in subsection 995-1(1) of the ITAA 1997 to include a nil amount.

Reducing the termination value of a depreciating asset for the purpose of section 40-285 of the ITAA 1997 seeks to recognise those expenses reasonably attributable to the balancing adjustment event to the extent they would not otherwise be deducted. The reduction ensures that only that part of the termination value of the asset that exceeds these expenses is taken into account for the purpose of the comparison of termination value and adjustable value (that is, the balancing adjustment) in section 40-285. This means that the reduction under section 40-315 of the ITAA 1997 is not a simple mathematical equation that can result in a termination value less than zero for the purpose of the comparison.

For the purpose of working out a balancing adjustment under section 40-285 of the ITAA 1997, therefore, the termination value of the taxpayer's depreciating asset is zero.

Year of income:  Year ended 31 December 2003 Year ended 31 December 2004 Year ended 31 December 2005 Year ended 31 December 2006

Legislative References:
Income Tax Assessment Act 1997
   section 40-285
   section 40-300
   subsection 40-300(2)
   section 40-305
   section 40-315
   subsection 995-1(1)

Case References:
EMI (Aust) Ltd v. FC of T
   71 ATC 4112
   (1971) 2 ATR 325

Related ATO Interpretative Decisions
ATO ID 2004/260
ATO ID 2004/261

Keywords
Balancing adjustments
Balancing adjustment event
Balancing adjustments on disposal of plant
Capital Allowances CoE
Termination value
Uniform capital allowance system

Business Line:  Effective Life and Capital Allowances Centre of Expertise

Date of publication:  26 March 2004

ISSN: 1445-2782