Edited version of private ruling

Authorisation Number: 1011638153806

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Ruling

Subject: Involuntary disposals - balancing adjustment - further period allowed by the Commissioner

Will the Commissioner exercise his discretion to extend the time limit for balancing adjustment roll-over relief, for involuntary disposal under section 40-365(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following periods:

1 July 2008 to 30 June 2009.

1 July 2009 to 30 June 2010.

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

A fire destroyed a building that you had your businesses in.

You were paid some of the insurance money for fixtures and fittings in the 2008-09 income year and the remainder in the 2009-10 income year.

Due to delays in constructing the building you are now buying the fixtures and fittings needed to conduct the businesses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-285.

Income Tax Assessment Act 1997 Section 40-295.

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

Income Tax Assessment Act 1997 Paragraph 40-365(3)(b).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

What happens if you no longer hold or use a depreciating asset?

Section 40-285 of the ITAA 1997 provides that 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 that when you stop holding the asset, for example if the asset is sold, lost or destroyed, a balancing adjustment event occurs.

You work out the balancing adjustment amount by comparing the asset's termination value (such as the proceeds from the sale of an asset) and its adjustable value at the time of the balancing adjustment event.

If the termination value is greater than the adjustable value, you include the excess in your assessable income.

If the termination value is less than the adjustable value, you can deduct the difference.

Involuntary disposal of a depreciating asset

An involuntary disposal occurs if a depreciating asset is:

· lost or destroyed

· compulsorily acquired by an Australian government agency, or

· disposed of to an Australian government agency after negotiations after 11.45am (by legal time in the ACT) on 21 September 1999.

You may offset an assessable balancing adjustment amount arising from an involuntary disposal against the cost of one or more replacement assets. If you offset an amount against the cost of a replacement asset for an income year after the one in which the replacement asset's start time occurs, you must also reduce the sum of its opening adjustable value plus any second elements of its cost for that later year.

Subsection 40-365(3) of the ITAA 1997 provides that 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 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 Commissioner can agree to extend the time limit - for example, if it is unlikely that insurance claims in relation to the disposal of the original asset will be settled within the required timeframe even though you have taken all reasonable steps to have the insurance claims settled.

To offset the assessable balancing adjustment amount, the replacement asset must be wholly used, or installed ready for use, by you for a taxable purpose at the end of the income year in which you incurred the expenditure on the asset or you started to hold it and you must be able to deduct an amount for it.

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

In the event of a destruction of large infrastructure 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.

Application to your circumstances

The assets of the business were destroyed in a fire. Some of the assets were replaced within 12 months of the balancing adjustment event but others were not replaced until recently due to a variety of delays.

An extension of time is allowed to obtain the remaining replacement assets.

The Commissioner will allow the extension of time for the balancing adjustment as it is considered that it would not have been possible for you to install the new equipment within the 12 month period.

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