ATO Interpretative Decision

ATO ID 2002/619

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 a beneficiary who disposes of a depreciating asset inherited from a deceased estate?

Decision

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

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 legal personal representative. The legal personal representative subsequently passed the asset to a beneficiary of the sole trader's estate. The market value of the asset at the time the beneficiary started to hold it was $21,000. The beneficiary soon sold the asset for $21,000. Neither the legal personal representative nor the beneficiary used the asset, or had it installed ready for use, for any purpose.

Reasons for Decision

The beneficiary stopped holding the asset at the time it was sold. 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.

The beneficiary 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 beneficiary is its cost.

Section 40-175 of the ITAA 1997 provides that the cost of an asset consists of two elements. Where a beneficiary starts to hold an asset inherited from a deceased estate, item 13 of the table in subsection 40-180(2) of the ITAA 1997 specifies that the first element of the cost of the asset to the beneficiary is the asset's market value when the beneficiary started to hold it, reduced by any capital gain in relation to the asset that was disregarded by the deceased under section 128-10 of the ITAA 1997 or by the legal personal representative under subsection 128-15(3) of the ITAA 1997.

Generally, section 128-10 of the ITAA 1997 and subsection 128-15(3) of the ITAA 1997 will apply to disregard a capital gain in relation to a depreciating asset if one of the exclusions in subsection 118-24(2) of the ITAA 1997 applies. One of the exclusions is when the capital gain or capital loss is made from CGT event K7 (section 104-235 of the ITAA 1997) happening. As the sole trader 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, CGT event K7 did not happen to the asset. The other exclusions in subsection 118-24(2) of the ITAA 1997 also do not apply. As a result, there was no capital gain for either to disregard. Accordingly, the first element of the cost of the asset is its market value at the time the beneficiary started to hold it (ie $21,000). In this case there is no second element of cost and the adjustable value of the asset in the hands of the beneficiary is $21,000.

When the beneficiary sells the asset, under paragraph 40-300(1)(b) of the ITAA 1997, the termination value of the asset is the amount the beneficiary is taken to have received under section 40-305 of the ITAA 1997. In this case, it is the amount the beneficiary received (ie $21,000).

As the termination value and the adjustable value of the asset are the same, the balancing adjustment amount worked out under section 40-285 is 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 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.

•

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 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.

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 13, subsection 40-180(2)
   section 40-285
   paragraph 40-295(1)(a)
   paragraph 40-300(1)(b)
   section 40-305
   section 104-235
   subsection 118-24(1)
   subsection 118-24(2)
   section 128-10
   subsection 128-15(3)

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

Keywords
Balancing adjustment event
Cost of a depreciating asset
First element of cost
Termination value
Uniform capital allowances system

Siebel/TDMS Reference Number:  DW367697

Business Line:  Small Business/Individual Taxpayers

Date of publication:  31 May 2002

ISSN: 1445-2782