ATO Interpretative Decision

ATO ID 2003/227

Income Tax

Capital Allowances: termination value of common property depreciating assets - Australian Capital Territory
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Is the termination value, under Subdivision 40-D of the Income Tax Assessment Act 1997 (ITAA 1997), of a depreciating asset forming part of the common property of an existing residential unit complex located in the Australian Capital Territory (ACT) nil under a balancing adjustment event that occurs as a result of the enactment of the Unit Titles Act 2001 (ACT) (UTA 2001)?

Decision

Yes. The termination value, under Subdivision 40-D of the ITAA 1997, of a depreciating asset forming part of the common property of an existing residential unit complex located in the ACT under a balancing adjustment event that occurs as a result of the enactment of the UTA 2001 is nil.

Facts

A taxpayer acquired a unit in a residential complex located in the ACT prior to 6 October 2001. The unit has been used to produce rental income since its acquisition.

Under this type of strata title development, the owners corporation becomes the holder of an estate of leasehold in the common property on registration of the units plan. The unit owners are members of the owners corporation which is a separate legal entity with specified powers, authorities, duties and functions.

Common property is that part of a strata plan not comprised in any owner's lot and includes both fixed and moveable property and facilities intended for common use. The common property may include depreciating assets and buildings and other structures.

The enactment of the UTA 2001, with effect from 6 October 2001, resulted in the estate of leasehold in the common property, including existing common property, in strata title developments in the ACT being held by the owners corporation as agent for the unit owners as tenants in common. Under the former act, Unit Titles Act 1970 (UTA 1970), common property was held by the owners corporation (formerly body corporate) as trustee for the unit owners as tenants in common.

Reasons for Decision

A holder of a depreciating asset must make a balancing adjustment to their assessable income if a balancing adjustment event occurs for the asset and the asset's decline in value is worked out under Subdivision 40-B of the ITAA 1997. The amount of the balancing adjustment is worked out under section 40-285 of the ITAA 1997 by comparing the asset's termination value with its adjustable value.

Section 40-300 of the ITAA 1997 provides that the termination value of a depreciating asset is worked out as at the time when a balancing adjustment event occurs. The termination value is, in certain circumstances, an amount specified in the table in subsection 40-300(2) of the ITAA 1997 or, more generally, the amount taken to have been received under section 40-305 of the ITAA 1997.

A balancing adjustment event occurs for a depreciating asset forming part of the common property of an existing unit complex as a result of the enactment of the UTA 2001 because the owners corporation stops holding the asset.

No item in the table in subsection 40-300(2) of the ITAA 1997 applies. The amount taken to have been received for a depreciating asset forming part of the common property must, therefore, be worked out under section 40-305 of the ITAA 1997.

Because the owners corporation stopped holding a depreciating asset forming part of the common property as a result of the enactment of the UTA 2001, it did not receive an amount or terminate a liability under the balancing adjustment event. Therefore, there is no amount taken to have been received under items 1 or 2 of the table in subsection 40-305(1) of the ITAA 1997. Similarly, no other item in the table applies.

As no item in the tables in subsections 40-300(2) or 40-305(1) of the ITAA 1997 applies, the termination value of a depreciating asset forming part of the common property under the balancing adjustment event is nil.

Date of decision:  12 March 2003

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 40-285
   section 40-300
   subsection 40-300(2)
   section 40-305
   subsection 40-305(1)
   subdivision 40-B
   subdivision 40-D

Related Public Rulings (including Determinations)
Taxation Ruling IT 2505

Related ATO Interpretative Decisions
ATO ID 2003/224
ATO ID 2003/225
ATO ID 2003/226
ATO ID 2003/228
ATO ID 2003/229

Other References:
Unit Titles Act 2001 (ACT)
Unit Titles Act 1970 (ACT)

Keywords
Balancing adjustment calculation
Balancing adjustment event
Balancing adjustments
Balancing adjustments on disposal of plant
Capital allowances CoE
Decline in value
Depreciation deduction
Holder of an item of plant
Uniform capital allowance system

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  4 April 2003
Date reviewed:  4 June 2014

ISSN: 1445-2782

history
  Date: Version:
You are here 12 March 2003 Original statement
  25 March 2015 Withdrawn