ATO Interpretative Decision

ATO ID 2003/598

Income Tax

Capital Allowances: first element of cost (increase in liability) - takeover of unincorporated association
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.

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Does Item 2 of the table in paragraph 40-185(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) apply in working out the first element of cost of depreciating assets started to be held by an incorporated association under the Associations Incorporation Act 1981 Qld (AIA (Qld)) on the takeover of an unincorporated association?

Decision

Yes. Item 2 of the table in paragraph 40-185(1)(b) of the ITAA 1997 does apply in working out the cost of depreciating assets started to be held by an incorporated association under the AIA (Qld) on the takeover of an unincorporated association as the incorporated association assumes the liabilities of the unincorporated association.

Facts

A is an incorporated association under the AIA (Qld) and B is an unincorporated association.

The members of both A and B agreed to the takeover of B in their special general meetings.

A changed its name to adopt B's name. The amended constitution of A provides for A to take over B's assets and liabilities.

The voting members and board members of A and B are the same persons.

Paragraph 42-1(a) of the AIA (Qld) provides that a change of name of an incorporated association does not affect its legal personality or identity.

Reasons for Decision

A's takeover of B results in a transfer of assets from B to A therefore it causes a balancing adjustment event to occur for the depreciating assets held by B, under paragraph 40-295(1)(a) of the ITAA 1997. The takeover also has the effect that A starts to hold the assets as the new owner of them (Item 10 of the table in section 40-40 of the ITAA 1997).

The first element of cost of a depreciating asset is worked out as at the time when the asset starts to be held. In certain circumstances, the cost is the amount specified in section 40-180 of the ITAA 1997. Otherwise, the cost is worked out under section 40-185 of the ITAA 1997 (subsection 40-180(1) of the ITAA 1997).

As no item in the table in subsection 40-180(2) of the ITAA 1997 applies, the cost is worked out under section 40-185 of the ITAA 1997. The cost under section 40-185 is taken to be the greater of the sum of the applicable amounts set out in paragraphs 40-185(1)(a) or (b) of the ITAA 1997. Item 2 of the table in paragraph 40-185(1)(b) of the ITAA 1997 includes in cost the amount of the liability (or increase in liability) incurred (or increased) to hold a depreciating asset.

The amended constitution of A provides for A to take over B's assets and liabilities. This means that in addition to starting to hold the assets of B, A assumes the liabilities of B.

In the present case, the liabilities referred to in Item 2 of paragraph 40-185(1)(b) of the ITAA 1997 encompass all of the liabilities assumed under the takeover of B. In this case, all of the liabilities assumed relate to all of the assets transferred, including depreciating assets. A reasonable attribution of the total amount of all of the liabilities assumed needs to be made to the depreciating assets. The amount so attributed is taken, under Item 2 of paragraph 40-185(1)(b) of the ITAA 1997 (see section 40-195 of the ITAA 1997), to have been paid to hold the depreciating assets. The relative market value of all the assets transferred is a reasonable basis on which to attribute the liabilities to the depreciating assets.

Date of decision: 13 June 2003

Year of income: Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 40-40
   section 40-180
   subsection 40-180(1)
   subsection 40-180(2)
   subsection 40-185
   paragraph 40-185(1)(a)
   paragraph 40-185(1)(b)
   paragraph 40-295(1)(a)

Associations Incorporation Act 1981 Qld
paragraph 42-1(a)

Related ATO Interpretative Decisions
ATO ID 2003/597
ATO ID 2003/599

Keywords
Depreciating assets
First element of cost
Balancing adjustment event
Capital allowances CoE

Business Line: Private Groups and High Wealth Individuals

Date of publication: 18 July 2003

ISSN: 1445-2782

history

	Date:	Version:
You are here →	13 June 2003	Original statement
	11 July 2014	Archived

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