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Ruling

Subject: Income Tax - Capital Allowances - Replacement of depreciable plant and equipment subject to involuntary disposal

Question 1

Will the Commissioner exercise his discretion pursuant to paragraph 40-365(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow the Company a further period in which to incur expenditure on replacement assets, more particularly, depreciable plant and equipment, destroyed by fire?

Answer

Yes

Question 2

Will the Commissioner treat as a 'replacement asset' for the purposes of section 40-365 of the ITAA 1997 all new depreciable plant and equipment acquired by the company which is, or will be:

· located in the new premises; and

· used in the same business as the depreciable assets destroyed in the fire

· notwithstanding that some of the new depreciable plant and equipment might not be equivalent to, or used for the same or similar purpose as the depreciable assets destroyed in the fire?

Answer

Yes

This ruling applies for the following period:

1 July 2009 to 30 June 2012

The scheme commences on:

1 July 2009 to 30 June 2010

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 company:

· is the head company of a tax consolidated group;

· had business premises which were destroyed by fire;

· has involuntarily disposed of depreciable plant and equipment which was situated at the business premises which was destroyed in the fire;

· received insurance proceeds for assets destroyed in the fire,

· the newly constructed premises took more than 12 months to construct.

· returned to the newly constructed business premises in 2012

· has been unable to spend a sufficient amount of the insurance proceeds to defer all of the assessable balancing adjustment that would ordinarily arise from the disposal of plant and equipment destroyed in the fire, as the buildings where the relevant replacement plant and equipment is or will be situated were not rebuilt by 30 June 2011;

· has and will use all replacement depreciable plant and equipment wholly for a taxable purpose in the same business that it carried on before the business premises were destroyed by fire;

· has determined that some of the depreciable plant and equipment may not be equivalent to, or used for the same or similar purpose as the depreciable plant and equipment destroyed in the fire.

Relevant legislative provisions

New Business Tax System (Capital Allowances) Bill 1999

New Business Tax System (Capital Allowances) Bill 2001

Income Tax Assessment Act 1997 section 40-365

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

Question 1

Summary

The Commissioner's discretion will be exercised to allow the company a further period of 12 months from 1 July 2011 to 30 June 2012 in order to purchase suitable replacement assets subsequent to the involuntary disposal of the original assets due to fire.

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 was 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.

In accordance with paragraph 40-365(3)(b) of the ITAA 1997 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 which the Commissioner allows, after the end of the income year in which the balancing adjustment occurred.

As a fire has destroyed the corporate headquarters including all of the depreciable plant and equipment the Company can choose to apply section 40-365 of the ITAA 1997 for the involuntary disposal of the depreciating assets.

In The Explanatory Memorandum for the New Business Tax System (Capital Allowances) Bill 2001 it states at paragraph 3.82:

Examples of when the Commissioner may allow a further period under paragraph 40-365(3)(b) include:

• 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; or

• in the event of the replacement asset being acquired from overseas it will be likely to take more than 12 months to deliver such assets, and there are no suitable corresponding assets acquired within 12 months before or after the destruction.

A further example of where the Commissioner may agree to extend the time limit is provided in 'The Guide to Depreciating Assets 2011' where it states that if it is unlikely that the insurance claims for the original asset will be settled within the required time even though you have taken all reasonable steps to have the insurance claim settled an extension of time may be granted.

As the new business premises, took more than 12 months to construct and, were incomplete and unable to be used by the Company as at 30 June 2011 (which was one year after the end of the income year in which the balancing adjustment event occurred) the Commissioner will exercise his discretion to grant a further period of time under paragraph 40-365(3)(b) of the ITAA 1997 in order to acquire replacement assets.

Question 2

Summary

The Commissioner will treat as a 'replacement asset' for the purposes of section 40-365 of the ITAA 1997 all new depreciable plant and equipment acquired by the company which is, or will be:

· located in the new corporate headquarters; and

· used in the same business as the depreciable assets destroyed in the fire

· notwithstanding that some of the new depreciable plant and equipment might not be equivalent to, or used for the same or similar purpose as the depreciable assets destroyed in the fire.

Detailed reasoning

Section 40-365 of the ITAA 1997 allows a taxpayer to reduce the cost of one or more replacement assets by an amount from a balancing adjustment event, instead of including that amount in their assessable income for the relevant income year. The taxpayer can make this choice if they stop holding the asset because the original asset is lost or destroyed and the replacement asset is used wholly for a taxable purpose.

What is a 'replacement asset' is not defined within the ITAA 1997. The Macquarie Dictionary defines 'replacement' as 'one that which replaces another' and the word 'replace' is defined as 'to fill or take the place of, to provide a substitute or equivalent'.

For the purposes of interpreting section 40-365 of the ITAA 1997, the phrase 'replacement asset' must also be considered with the words around it and the Income Tax Assessment Act as a whole. Where it is open to do so, provisions are to be construed in a way that is 'consistent with the language and purpose of all the provisions of the statute' (Project Blue Sky Inc & Others v Australian Broadcasting Authority (1998) 194 CLR 355 at 381).

As section 40-365 of the ITAA 1997 is a restatement of the former section 42-293 of the ITAA 1997, the explanatory memorandum of the New Business Tax System (Capital Allowances) Bill 1999 (the Bill) assists in clarifying the purpose and the intent of the provision. It states that the Bill allows a new balancing adjustment offset provision for certain involuntary disposals of plant and the purpose of this new provision ensures taxpayers who are forced to dispose of plant will not be disadvantaged.

Former section 42-293 of the ITAA 1997 mirrors the CGT rollover relief for involuntary disposals and it follows then the phrase 'replacement asset' is to be interpreted in accordance with the broad purpose of the provisions to provide flexibility and reduce unnecessary compliance.

Given the broad ordinary meaning of the term 'replacement assets' and the broad meaning applied to the term for the operation of the CGT rollover relief provisions, it is considered that a replacement asset does not need to fulfil the same function as an original asset.

In this case the plant and equipment was lost in a fire. The company will acquire new depreciable plant and equipment for use at the same location of business and in the same business carried prior to the involuntary disposal event. The new plant and equipment will be used wholly for taxable purposes but may not be equivalent to or used for the same or similar purpose as, the destroyed plant and equipment. A replacement asset is one that takes the place of the original asset and it does not need to be used for the same or similar purpose to the purpose for which the original asset was used. Accordingly, the new plant and equipment can be replacement assets for the purposes of section 40-365 of the ITAA 1997.