Edited version of private advice

Authorisation Number: 1052358056132

Date of advice: 03 March 2025

Ruling

Subject: Deductions

Question 1 - balancing adjustments

When you disposed of the dwellings, will a balancing adjustment occur under Division 40 of the Income Tax assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2 - deductions

Are you entitled to a deduction for the lease payments under section 8-1 of the ITAA 1997?

Answer 2

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You entered an agreement to purchase cabins located at the property.

Purchase price of cabins and further details:

-                A - Amount specified.

-                B - Amount specified.

-                You paid a deposit of specified amount.

-                Purchase is subject to the remaining balance being paid over the period in equal monthly instalments.

-                Interest rate to not exceed % per annum.

-                Settlement occurred in specified period for both cabins.

-                The land where the cabins are located is essentially operated as short-term holiday accommodation.

Throughout your ownership the cabins have been used for income producing purposes.

On the specified date, you entered into a contract agreement with the lessor with the following conditions:

-                You agreed to the lease hold interest in the lots at the property.

-                Purchase the cabins as per the terms of the agreement.

-                Maintain the cabins on the lots for the duration of the lease.

-                Lease term was specified years.

-                Lease payments were specified (remaining purchase balance) plus interest of % per annum.

-                This equated to lease payments of specified amount per month split between purchase balance and interest.

In the financial year, you paid lease payments of amount specified. This has been split between:

-                Principal amount.

-                Interest amount.

-                Only the interest component has been claimed as an upfront deduction.

On the specified date, you received a letter from the liquidator advising that they were appointed receivers and managers of the property. They requested documents in relation to your cabins located at the property and 30 days written notice of your intentions to deal with, encumber or otherwise dispose of your apparent interest in the property.

After receiving the letter, you continued to lease your cabins and pay monthly lease payments to the lessor as per your contract agreement.

On the specified date, the liquidators terminated all leases, they offered to provide financial contribution for the cost of relocating the cabins or to purchase the cabins.

Under the agreement with the liquidator's, you agreed to sell the cabins, instead of relocating them.

On the specified date, you sold the cabins to the liquidators.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 40-30(1)

Income Tax Assessment Act 1997 Division 40-30(2)

Income Tax Assessment Act 1997 paragraph 40-285

Income Tax Assessment Act 1997 paragraph 40-295(1)(a)

Reasons for decision

Issue - balancing adjustment

Summary

A balancing adjustment event occurred when you disposed of the cabins under the written agreement.

Detailed reasoning

Depreciating assets

A depreciating asset is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. This division applies to an improvement to land, or a fixture on land, whether the improvement or fixture is removable or not, as if it were an asset separate from the land.

However, land, trading stock and intangible assets (except those mentioned in subsection 40-30(2)) are excluded from this definition.

The decline in value is based on the cost and effective life of the depreciating asset, not its actual change in value. It begins at start time, when you begin to use the asset (or when you have it installed ready for use). It continues while you use the asset (or have it installed).

Balancing adjustments

Section 40-295 of the ITAA 1997 explains when you stop holding a depreciating asset for income producing purposes a balancing adjustment will occur. A taxpayer will stop holding a depreciating asset for various reasons. In your circumstances it was when you disposed of the cabins under a written agreement.

Section 40-285 of the ITAA 1997, explains the amount of the balancing adjustment is calculated by comparing the asset's termination value with its adjustable value.

Subsection 40-285(1) of the ITAA 1997, provides if the termination value of the depreciating asset is more than its adjustable value, the difference is included in your assessable income in the income year in which the balancing adjustment event occurred.

Subsection 40-285(2) of the ITAA 1997, provides if the termination value of the depreciating asset is less than its adjustable value, the difference is deductible in the income year in which the balancing adjustment event occurred.

Application to your circumstances

When the liquidators terminated all leases, they offered financial contribution to relocate the cabins. This demonstrates they were not affixed to the land and clearly identifiable as being separate from the land. Therefore, they meet the definition of a depreciating asset.

The balancing adjustment occurred when you stopped holding the cabins for income producing purposes.

You will be entitled to claim a deduction in the financial year you disposed of the cabins, if the termination value is less than its adjustable value just before the balancing adjustment occurred under section 40-285 (2) of the ITAA 1997.

Question 2

Summary - deductions

The lease payments that relate to the remaining purchase amount for the cabins are capital in nature and not deductible under 8-1 of the ITAA 1997.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Application to your circumstances

The lease hold agreement detailed the remaining purchase amount for the cabins was to be paid in monthly equal instalments over the specified period, as well as a % per annum interest charge. The lease payments that relate to the remaining purchase amount for the cabins are capital in nature and not deductible under 8-1 of the ITAA 1997.

The lease payments that relate to the % per annum interest charge and management fees will be deductible under 8-1 of the ITAA 1997.

However, as you have already claimed a deduction for these amounts, you cannot claim them again.

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