ATO Interpretative Decision

ATO ID 2007/36

Income Tax

Capital Allowances: application of Division 58 of the Income Tax Assessment Act 1997 to water facilities
FOI status: may be released
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Issue

Does Subdivision 58-B of the Income Tax Assessment Act 1997 (ITAA 1997) modify the way in which the transition entity works out the decline in value under section 40-540 of Subdivision 40-F of the ITAA 1997 of water facilities which are privatised assets at the transition time?

Decision

No. The rules in Subdivision 58-B will not modify the way in which the transition entity works out the decline in value under section 40-540 of the ITAA 1997 of water facilities which are privatised assets at the transition time.

Facts

The taxpayer is a transition entity for the purposes of Division 58 of the ITAA 1997. All the shares in the taxpayer were sold under a sale process that was an entity sale situation within the meaning of that term in Division 58. The transition time for the purposes of Division 58 was the date of the sale of the shares. The transition entity owns water facilities as defined under subsection 40-520(1) of the ITAA 1997 that are privatised assets for the purposes of Division 58.

The taxpayer is entitled to a deduction for the decline in value of the water facilities under paragraph 40-515(1)(a) of Subdivision 40-F of the ITAA 1997 at the transition time.

Reasons for Decision

All legislative references in the Interpretative Decision are to the ITAA 1997.

Division 58 applies to an entity that is a transition entity in an entity sale situation where the income of an exempt entity becomes, to any extent, taxable. Subdivision 58-B contains the operative provisions of Division 58. The purpose of the rules in Subdivision 58-B is detailed in section 58-60 which provides as follows:

This Subdivision sets out rules that affect the way in which the transition entity or the purchaser work out the decline in value of, and balancing adjustments for, privatised assets under Division 40 after the transition time or the acquisition time.

It is apparent from a consideration of the rules in Subdivision 58-B, that those rules only operate to modify the way in which a transition entity works out the decline in value of each privatised asset when that decline in value is worked out under Subdivision 40-B. For example, Subdivision 58-B operates to modify the way in which the transition entity works out the cost, adjustable value, effective life, and the method of decline in value used for each privatised asset.

There is no reasonable interpretative approach which can be used to apply the modifying rules in Subdivision 58-B to Subdivision 40-F. Subdivision 40-F does not use the concepts of cost, adjustable value, effective life or method of decline in value (in the sense required by Subdivision 58-B) in working out deductions for water facilities. It is, therefore, not considered appropriate to read into Division 58 any modifications that have not expressly been included.

Division 58 clearly applies to an entity sale situation where the transition entity is eligible for an expenditure based deduction under paragraph 40-515(1)(a) in respect of capital expenditure incurred on the construction of the privatised assets held by the transition entity just before the transition time. However, it is considered that the rules in Subdivision 58-B have no effect on the ordinary operation of the rules in Subdivision 40-F. The rules in Subdivision 40-F will therefore apply to work out the decline in value of the privatised assets after the transition time without any modification.

This view is supported by paragraph 12.97 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001 which inserted new Division 58 on the introduction of Division 40, and which (to the extent it is relevant here) states:

Under the new Division 58 calculation rules, taxpayers will simply use the ordinary Division 40 rules with some minor modifications for all privatised depreciating assets. Taxpayers will no longer be required to apply rules contained in superseded depreciation regimes. Transition entities will now work out actual deductions for decline in value (after the transition time) of a privatised depreciating asset in the same way as a purchaser does in an asset sale situation, but subject to the requirement that a transition entity cannot change methods of depreciation for an asset.

Therefore, Division 58 does not alter the ordinary operation of Subdivision 40-F and the transition entity will be able to work out the decline in value of each of the privatised assets that are water facilities under section 40-540 of Subdivision 40-F after the transition time without any modification.

Date of decision:  20 December 2006

Year of income:  Year ending 30 June 2005 Year ending 30 June 2006 Year ending 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   Division 40
   Subdivision 40-B
   Subdivision 40-F
   paragraph 40-515(1)(a)
   subsection 40-520(1)
   section 40-540
   Division 58
   Subdivision 58-B
   section 58-60

Related ATO Interpretative Decisions
ATO ID 2007/35
ATO ID 2007/37

Other References:
Explanatory Memorandum to the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001

Keywords
Decline in value
Depreciating assets
Transitional entity

Siebel/TDMS Reference Number:  5380179

Business Line:  Public Groups and International

Date of publication:  23 February 2007

ISSN: 1445-2782

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