Edited version of private ruling

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Ruling

Subject: Commissioner's discretion under subsection 40-365(3)

Will the Commissioner exercise his discretion under subsection 40-365(3) of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the time required to acquire replacement assets?

Yes.

Relevant facts and circumstances

You carried on a business in an area that suffered a severe natural disaster. The buildings that you used in your business, including their fittings and fixtures, were destroyed. You received insurance proceeds that resulted in an assessable balancing adjustment under section 40-285 of the ITAA 1997. You have decided to rebuild the business property, which will include fixtures and fittings that qualify as replacement assets under section 40-365 of the ITAA 1997.

You provided the following grounds in support of an extension the time to acquire replacement assets:

· The disaster had a substantial impact on you, such that you were unsure as to whether you could emotionally deal with returning to rebuild.

· There was a great deal of uncertainty regarding the re-establishment of the area.

· Due to the level of destruction of the area, there was a significant period of time where the infrastructure of the area needed to be re-established to the extent necessary to proceed with constructing the replacement buildings.

· There was some uncertainty regarding the likely building requirements and infrastructure that would be required by the State Government to rebuild and operate the industry you are involved in.

· You were uncertain as to the future commercial viability of the activity given the destruction in the areas and whether demand would return in sufficient magnitude.

· There is currently a waiting list of at least six months to obtain appropriate plans and permits, let alone finding appropriately qualified tradespersons.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-285

Income Tax Assessment Act 1997 Section 40-295

Income Tax Assessment Act 1997 Section 40-365

Income Tax Assessment Act 1997 Subsection 40-365(3)

Reasons for decision

Section 40-285 of the ITAA 1997 provides if a balancing adjustment event occurs for a depreciating asset you held, you need to calculate a balancing adjustment amount to be included in your assessable income or to claim as a deduction.

Section 40-295 of the ITAA 1997 states a balancing adjustment event occurs when you stop holding the asset, such as if the asset is sold, lost or destroyed.

Section 40-365 of the ITAA 1997 allows a taxpayer to choose whether or not to include a balancing adjustment amount in their assessable income where they cease to hold a depreciating asset because it is destroyed. The taxpayer can choose to use some or the entire amount that would otherwise be a balancing adjustment as a reduction in the cost and/or opening adjustable value of the replacement assets.

Subsection 40-365(3) of the ITAA 1997 provides the option to offset the balancing adjustment against the cost of the replacement asset may only be chosen if you incur the expenditure on the replacement asset or if you start to hold it:

· no earlier than one year, or within a period the Commissioner allows, before the balancing adjustment event occurred, and

· no later than one year, or within a further period the Commissioner allows, after the end of the income year in which the balancing adjustment event occurred.

The Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 at paragraph 3.82 provides an example of when the Commissioner may allow a further period under section 40-365(3)(b) ITAA 1997 is:

In the event of a destruction of large infra structure assets it will be likely to take more than 12 months to rebuild those assets, and there are no suitable corresponding assets acquired within 12 months before or after destruction

In your case, the Commissioner is satisfied the impacts of the disaster has resulted in you requiring an extension of time to replace your destroyed assets. It follows the Commissioner grants his discretion in your case, as you have requested.

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