ATO Interpretative Decision

ATO ID 2004/724 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. Guidance on this issue can be found in Guide to depreciating assets 2017 (NAT 1996) and the Rental Properties 2017 (NAT 1729).
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does section 40-285 of the Income Tax Assessment Act 1997 (ITAA 1997) apply if there is a disposal, as part of the sale of a business, of units of plant pooled under the former sections 62AAC and 62AAE of the Income Tax Assessment 1936 (ITAA 1936)?

Decision

Yes. Section 40-285 of the ITAA 1997 does apply if there is a disposal, as part of the sale of a business, of units of plant pooled under the former sections 62AAC and 62AAE of the ITAA 1936. The pool is treated as a single depreciating asset for the purposes of Division 40 of the ITAA 1997. A balancing adjustment event occurs for that single depreciating asset when the units of plant in the pool are disposed of.

Facts

The taxpayer carried on a business for the purpose of producing assessable income. The taxpayer created a pool and allocated depreciable units of plant to that pool under the former sections 62AAC and 62AAE of the ITAA 1936.

There were no units of plant removed from the pool and the taxpayer continued to depreciate those units in the pool until it sold the business, including all its assets, as a going concern in the 2003-04 income year. The taxpayer ceased carrying on business at that time.

The adjustable value of the pool at that time was $200,000. As part of the sale, the taxpayer received $300,000 as consideration for the pooled units of plant, which was the market value of the units at that time.

There was no roll-over relief under section 40-340 of the ITAA 1997 and the taxpayer and the buyer dealt with each other at arm's length.

Reasons for Decision

The former sections 62AAC and 62AAE of the ITAA 1936 were part of the pooling provisions in the former sections 62AAB to 62AAV of the ITAA 1936. These provisions allowed taxpayers to pool units of plant which were depreciable at the same rate. Section 53I of the ITAA 1936 ensures that the operation of these provisions was limited to the 1996-97 and earlier income years. For the 1997-98 to 2000-01 income years inclusive, the corresponding provisions were contained in the former Subdivision 42-L of the ITAA 1997.

However, section 42-355 of the Income Tax (Transitional Provisions) Act 1997) (IT(TP)A 1997) ensures that a pool created under the ITAA 1936 continues for the 1997-98 and later income years as if it had been created under the former section 42-355 of the ITAA 1997. Likewise, section 42-360 of the IT(TP)A 1997 ensures that plant that was allocated to the pool before the 1997-98 income year remains allocated to the pool. Sections 42-375 and 42-380 of the IT(TP)A 1997 then ensure that the appropriate depreciation deduction calculations for the pool continued under the former Subdivision 42-L of the ITAA 1997.

The former Subdivision 42-L of the ITAA 1997 was repealed with effect from 1 July 2001 as part of the introduction of the uniform capital allowances system in Division 40 of the ITAA 1997.

In order for taxpayers to continue to claim deductions for these pools, section 40-60 of the IT(TP)A 1997 deals with the transition of a pool under the former Subdivision 42-L of the ITAA 1997 into Division 40 of the ITAA 1997. In particular, it provides that the pool is treated as a single depreciating asset for the purposes of Division 40 of the ITAA 1997. That asset's cost and opening adjustable value at 1 July 2001 is the pool closing balance at the end of the 2000-01 income year. The decline in value of that asset is then worked out using the formula under section 40-70 of the ITAA 1997 by substituting the component 'Asset's *effective life' in the formula with the pool percentage for the pool.

Subsection 40-285(1) of the IT(TP)A 1997 ensures that the balancing adjustment provisions in Division 40 of the ITAA 1997 apply to depreciating assets held as at 1 July 2001 if a balancing adjustment event occurs for those depreciating assets. Accordingly, on the sale of the assets in the pool, section 40-285 of the ITAA 1997 applies because a balancing adjustment event occurs for that single depreciating asset.

This section requires a comparison between the termination value of the single depreciating asset and the adjustable value of the single depreciating asset just before the balancing adjustment event occurred. Consequently, there is no requirement to reconstruct individual adjustable values for the assets in the pool.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   section 53I
   sections 62AAB to 62AAV

Keywords
Assessable balancing adjustment amount
Balancing adjustment calculation for pooled plant
Balancing adjustment event
Balancing adjustments
Balancing adjustments on disposal of plant
Depreciation pooling
Disposal of pooled plant
Pooling
Uniform capital allowances system

Business Line:  Small Business/Individual Taxpayers

Date of publication:  3 September 2004

ISSN: 1445-2782