ATO Interpretative Decision

ATO ID 2002/618

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

What is the balancing adjustment amount under section 40-285 of the Income Tax Assessment Act 1997 (ITAA 1997) for the LPR when the LPR passes a depreciating asset to a beneficiary of a deceased estate?

Decision

The balancing adjustment amount worked out under section 40-285 of the ITAA 1997 is $4,000.

Facts

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. The sole trader used the asset solely for the purpose of producing assessable income. When the sole trader died on 28 February 2002 the asset passed to the LPR. At the time of death the asset's adjustable value was $17,000. The LPR subsequently passed the asset to a beneficiary of the sole trader's estate. The market value of the asset just before the LPR stopped holding it was $21,000. The LPR did not use the asset, or have it installed ready for use, for any purpose.

Reasons for Decision

The LPR stopped holding the asset at the time the asset passed to the beneficiary. Accordingly, a balancing adjustment event occurred for the asset under paragraph 40-295(1)(a) of the ITAA 1997. To work out the balancing adjustment amount, section 40-285 of the ITAA 1997 requires a comparison of the asset's termination value with its adjustable value just before the balancing adjustment event occurred. If the termination value is more than the adjustable value, the excess is included in the assessable income under subsection 40-285(1) of the ITAA 1997 as an assessable balancing adjustment amount. If the termination value is less than the adjustable value, the difference can be deducted under subsection 40-285(2) of the ITAA 1997 as a deductible balancing adjustment amount.

The LPR did not use the asset, or have it installed ready for use, for any purpose. In these circumstances, paragraph 40-85(1)(a) of the ITAA 1997 provides that the adjustable value of the asset in the hands of the LPR is its cost.

Section 40-175 of the ITAA 1997 provides that the cost of an asset consists of two elements. Where a depreciating asset passes to an LPR because a person dies, item 12 of the table in subsection 40-180(2) of the ITAA 1997 specifies that the first element of the cost of the asset is the asset's adjustable value at the time of death. In this case there is no second element of cost. Consequently, the adjustable value of the asset in the hands of the LPR is $17,000.

The passing of the asset from the LPR to the beneficiary was not a dealing between persons at arm's length. Accordingly, item 6 of the termination value table in subsection 40-300(2) of the ITAA 1997 specifies that the termination value of the asset is its market value just before the LPR stopped holding it (ie $21,000).

As the asset's termination value is more than its adjustable value, the difference between the termination value of $21,000 and the adjustable value of $17,000 (ie $4,000) is an assessable balancing adjustment amount that is included in the LPR's assessable income under subsection 40-285(1) of the ITAA 1997.

There are no capital gains tax implications for the asset as a result of its passing from the LPR to the beneficiary because:

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Subsection 118-24(1) of the ITAA 1997 provides that any capital gain or loss that a taxpayer makes from a CGT event, that is also a balancing adjustment event that happens to a depreciating asset the taxpayer 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 the taxpayer used it.

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Subsection 118-24(2) of the ITAA 1997 provides exclusions to the rules in subsection 118-24(1) of the ITAA 1997, 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 LPR 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.

Amendment History

Year of income:  30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   Division 40
   Subdivision 40-B
   paragraph 40-85(1)(a)
   section 40-175
   item 12, subsection 40-180(2)
   section 40-285
   subsection 40-285(1)
   subsection 40-285(2)
   paragraph 40-295(1)(a)
   item 2, subsection 40-300(2)
   section 104-235
   subsection 118-24(1)
   subsection 118-24(2)

Related ATO Interpretative Decisions
ATO ID 2002/617
ATO ID 2002/619

Keywords
Assessable balancing adjustment amount
Balancing adjustment event
Cost of a depreciating asset
First element of cost
Legal personal representatives
Termination value
Uniform capital allowances system

Siebel/TDMS Reference Number:  DW367697; 1-60407GB

Business Line:  Small Business/Individual Taxpayers

Date of publication:  31 May 2002

ISSN: 1445-2782