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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private advice

Authorisation Number: 1051630523913

Date of advice: 30 January 2020

Ruling

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

Question 1

Will the Commissioner allow a further period of time until 30 June 2020 to incur expenditure on the replacement asset under paragraph 40-356(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on

20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The entity manufactures particular products.

Equipment used in the manufacturing process was destroyed.

The entity commenced the process of claiming insurance compensation very shortly after the accident.

After the incident happened, cleaning and examination work was required before the entity could start the process of building and acquiring the parts for the replacement assets.

The entity was required to purchase the various parts from overseas before they could be put together.

The reconstruction is not yet completed and remains ongoing due to the size and nature of the asset. It is anticipated that construction and installation will be completed shortly.

The entity has received some compensation arising from the claims it has made to the insurer. However, it is continuing negotiations with its insurer with respect to the total insurance claim.

As the claim made was substantial, due to the size and significance of the equipment in the entity's business, the process to negotiate with the insurer has taken some time.

The negotiations at the beginning of the process were held up resulting in an approximately six month lead time for progress payments. There is now generally a three month lag between submitting costs for payment and reimbursement.

The entity has provided all of the relevant dates.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 40-D

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 (ITAA 1997)unless otherwise stated.

Summary

The Commissioner will allow a further period of time until 30 June 20XX to incur expenditure on the replacement asset under paragraph 40-356(3)(b).

Detailed reasoning

Section 40-365 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 lost or destroyed.

The taxpayer can choose to utilise some or the entire 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.

Under paragraph 40-356(3)(b) the 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.

The factors that the Commissioner uses to make a favourable decision are delays outside the control of the taxpayer or situations where construction time makes it difficult to replace the asset within the required time.

Chapter 3.82 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 and New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001 provide examples of when the Commissioner may allow a further period under paragraph 40-365(3)(b) which include:

The equipment used by the entity was destroyed. The entity has had to import components for the replacement assets and although construction commenced at a certain date it is still ongoing due to the size and nature of the asset.

Further, the Guide to Depreciating Assets 2019 (NAT 1996-6.2019) states that

...The Commissioner can agree to extend the time limit, for example, if it is unlikely that insurance claims for the disposal of the original asset will be settled within the required time even though you have taken all reasonable steps to have the insurance claims settled.

The entity is still in the process of negotiations with the insurer in respect of the total insurance claim.

On consideration of the facts and circumstances the Commissioner will exercise his discretion under paragraph 40-365(3)(b) to allow a further period of time until 30 June 20XX to incur the expenditure on the replacement assets.

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