Edited version of private advice

Authorisation Number: 1051790955962

Date of advice: 16 December 2020

Ruling

Subject: Commissioner's discretion to provide extra time to incur expenditure on replacement depreciating assets

Question

Will the Commissioner exercise his discretion to provide further time for the asset holding Trusts to incur expenditure on replacement assets or start to hold replacement assets 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

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Trust A was the owner of a commercial property (Property) comprising two buildings containing commercial property infrastructure and amenities.

Trust B has been the operator of the commercial property since it was acquired by Trust A.

The Property owned by Trust A is leased to Trust B pursuant to a lease agreement between the two Trusts.

Trust A held plant and equipment (depreciating assets) associated with the buildings it owned.

Trust B acquired and held plant and equipment (depreciating assets) for use in carrying on its commercial property business operations.

Both Trusts have been claiming deductions for the decline in value of the depreciating assets pursuant to Division 40 of the ITAA 1997.

In July 20XX, a fire occurred at the commercial property resulting in destruction of the Property, depreciating assets and trading stock. No assets remained functional or on-hand or in use after the fire.

Due to the extensive damage, the entire Property required rebuilding. This included, removal of the destroyed Property, preparatory activity (finalising plans, receiving approvals, claiming insurance to fund the rebuild), re-build of the building, rebuild of the fit-out, with depreciating assets being the final acquisition in the overall rebuild process.

The rebuild of the Property is expected to be completed in the first quarter of 20XX subject to possible construction delays.

On the basis the Trusts stopped holding the assets, a balancing adjustment occurred to the depreciating assets destroyed as a result of the fire pursuant to section 40-295 to the ITAA 1997 in the income year the fire occurred.

The written down value of the property, plant and equipment at the time of the fire for both trusts being less than insurance consideration received resulted in balancing adjustment gains for the income year. Pending the exercise of the Commissioners Discretion both Trusts seek to exclude the balancing adjustment gains from their assessable income for this income year.

They will instead choose to treat their balancing adjustment gains as an amount to be applied to reduce the cost of one or more replacement assets in the income year in which the replacement assets are used or installed ready for use.

At the end of the income year in which the asset holding Trusts either incurs expenditure on, or starts to hold, the replacement assets, both Trusts intend to use the replacement assets in their commercial property businesses for a wholly taxable purpose.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 40-D

Reasons for decision

Summary

The Commissioner will allow both asset holding Trusts a further period of time to incur expenditure on the replacement asset under paragraph 40-356(3)(b) of the ITAA 1997.

Detailed reasoning

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 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.

The choice 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 (subsection 40-365(3) of the ITAA 1997).

In making the 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 they can deduct and amount for it (subsection 40-365(4) of the ITAA 1997).

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 an example of when the Commissioner may allow a further period under paragraph 40-365(3)(b) of the ITAA 1997:

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

Further, the Guide to Depreciating Assets 2020 (NAT 1996-06.2020) 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.

In this case, the Property was extensively damaged by fire requiring the insurance claim payment and Property re-building process to occur before expenditure could be incurred for the replacement depreciating assets. This occurred over a period of more than two years.

On consideration of the facts and circumstances the Commissioner will exercise his discretion under paragraph 40-365(3)(b) of the ITAA 1997 to allow the Trusts a further period of time until 30 June 20XX to incur the expenditure on the replacement assets.

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