Edited version of private ruling

Authorisation Number: 1011825681855

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Ruling

Subject: Involuntary disposal - balancing adjustment

Question

Will the Commissioner allow the taxpayer a further period of time to acquire a replacement asset under paragraph 40-365(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer owned a commercial rental property which has been rented for a number of years.

The property was extensively damaged by a fire. As a result of the damage the building was demolished and the lessee exercised its right to cancel the lease.

The insurer made payments within a reasonable timeframe for demolition costs, loss of rent and building cover.

The taxpayer has consulted to develop plans to rebuild the site.

Given current economic conditions and stipulations made by financiers the taxpayer has decided not to commence with building until they secure a suitable tenant. They are currently in negotiation with a prospective tenant but they have not committed to anything at this stage.

The taxpayer will not acquire replacement assets within the required timeframe.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-365

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

Income Tax Assessment Act 1997 Subsection 40-365(4)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, 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

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 all of the amount that would otherwise be a balancing adjustment as a reduction in the cost and/or opening adjustable value of one or more replacement assets. The cost of the replacement asset is reduced by the otherwise assessable amount.

This exclusion can only be made where they incur the expenditure on the replacement assets 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 occurred (paragraph 40-365(3)(b) of the ITAA 1997).

In making this choice the taxpayer must have used the replacement asset, or have it installed ready for use, wholly for a taxable purpose by the end of the income year in which they incurred the expenditure on the asset, or started to hold it, and be able to deduct an amount for it (see subsection 40-365(4) of the ITAA 1997).

In this case, a fire destroyed the depreciating assets. The taxpayer can choose to apply section 40-365 of the ITAA 1997.

Given that the insurance claims were settled within a reasonable timeframe and in the absence of special circumstances the Commissioner will not exercise his discretion to grant a further period of time under paragraph 40-365(3)(b) of the ITAA 1997.

It is accepted that the taxpayer made a decision not to commence the rebuilding process until a suitable tenant was secured and that this decision was made due to current economic conditions and other stipulations made by the financier. However these would not amount to special circumstances for the purpose of the Commissioner's Discretion.

Support for this decision can be drawn from Taxation Determination TD 2000/40 which explains the operation of paragraph 124-75(3)(b) of the ITAA 1997 (the capital gains tax treatment of acquiring another (replacement) asset). Both the wording and the operation of paragraph 40-365(3)(b) of the ITAA 1997 are similar to paragraph 124-75(3)(b) of the ITAA 1997. TD 2000/40 lists a number of examples where the Commissioner will allow further time where special circumstances exist. The circumstances outlined in those examples affected each taxpayer's ability to progress the roll over. Those circumstances are different to the position of this taxpayer, who has made the decision not to progress the roll over until they can meet certain requirements.

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