ATO Interpretative Decision

ATO ID 2005/190

Income Tax

Capital Allowances: balancing adjustment event-depreciating asset that failed to work - attempts to make the asset work were abandoned
FOI status: may be released

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Status of this decision: Decision Current

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Did a balancing adjustment event occur under paragraph 40-295(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) for a depreciating asset, which never worked and attempts to repair the asset were abandoned?

Decision

Yes. As the taxpayer had not used a depreciating asset, never had it installed ready for use and had decided never to use it, a balancing adjustment event occurred under paragraph 40-295(1)(c) of the ITAA 1997.

Facts

The taxpayer purchased a depreciating asset to be used in their business. The depreciating asset was to be used entirely for a taxable purpose.

The depreciating asset failed to work from the time of purchase. Attempts to repair the depreciating asset were unsuccessful and the supplier refused to provide a replacement. The matter was then taken to Court and the taxpayer was successful, but the supplier went into liquidation before the taxpayer could enforce the Court's findings.

The taxpayer decided not to continue to keep attempting to make the asset work, but continued to hold the asset.

Reasons for Decision

Paragraph 40-295(1)(c) of the ITAA 1997 provides that a balancing adjustment event occurs for a depreciating asset if the taxpayer has not used it and:

(i): if the taxpayer had it installed ready for use - the taxpayer stops having it so installed, and
(ii): the taxpayer decides never to use it.

A depreciating asset which does not work during the period that it is held by a taxpayer and proves to be unable to work cannot be said to have been used or installed ready for use during that period.

Under these circumstances, the taxpayer's abandonment of attempts to repair the depreciating asset is evidence that a decision was made by the taxpayer to never use the asset. At the time of abandonment of attempts to make the asset work there occurred a balancing adjustment event under paragraph 40-295(1)(c) of the ITAA 1997.

Date of decision: 11April 2003

Year of income: Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
paragraph 40-295(1)(c)

ATO Interpretative Decisions overturned by this decision
ATO ID 2003/457

Keywords
Balancing Adjustment Event
Depreciating asset
Uniform Capital allowances

Siebel/TDMS Reference Number: 4638573

Business Line: Private Groups and High Wealth Individuals

Date of publication: 1 July 2005

ISSN: 1445-2782

history

	Date:	Version:
You are here →	11 April 2003	Original statement
	12 December 2014	Updated statement

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