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Ruling
Subject: Deduction-decline in value
Question:
Does a balancing adjustment event occur when an asset is no longer used for taxable purposes?
Answer:
Yes
This ruling applies for the following periods
Year ended 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
The scheme commenced on
1 July 2011
Relevant facts
You operate a business.
You purchased a number a number of assets during the financial year.
The manufacturer provides a warranty for the assets (the warranty period).
You do not use the assets beyond the warranty period due to the increased reject rate of the products that are produced.
You cease using the assets and purchase new ones at the end for the warranty period.
You do not resell the used assets as there is a risk that the assets will be used for fraudulent activity.
You store the used assets and never use them again.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 40-25
Income Tax Assessment Act 1997 subsection 40-25(7)
Income Tax Assessment Act 1997 section 40-70
Income Tax Assessment Act 1997 section 40-75
Income Tax Assessment Act 1997 section 40-105
Income Tax Assessment Act 1997 section 40-285
Income Tax Assessment Act 1997 paragraph 40-295(1)(b)
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a deduction is allowable for expenses incurred in gaining or producing assessable income, provided those expenses are not capital, private or domestic in nature.
Generally, the purchasing of plant and equipment are generally of a capital nature and are deducible under Division 40 of the ITAA 1997.
Decline in value
Division 40 of the ITAA 1997 deals with deductions for the cost of depreciating assets. Section 40-25 of the ITAA 1997 allows a taxpayer to deduct an amount equal to the decline in value of a depreciating asset which is held for any time during an income year and used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income [subsection 40-25(7) of the ITAA 1997].
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over time.
Sections 40-70 and 40-75 of the ITAA 1997 detail the two methods of calculating the deduction for the decline in value of a depreciating asset.
Effective life
You can use the Commissioner's determination of effective life for a depreciating asset or self-assess the effective life.
Under section 40-105 of the ITAA 1997 your self-assessment must be based on an estimate of the time the asset can be used from your expected use, having regard to reasonable wear and tear and assuming it will be maintained in reasonably good order and condition.
For the 2011-12 income year, Taxation Ruling TR 2012/2 provides an explanation of the methodology upon which the Commissioner's determinations of the effective life of various depreciating assets is based on.
Balancing adjustments
Section 40-285 of the ITAA 1997 provides that if a balancing adjustment event occurs for a depreciating asset you held, you need to calculate a balancing adjustment amount to be included in your assessable income or to claim as a deduction.
Section 40-295 of the ITAA 1997 a balancing adjustment occur when:
· you stop holding the asset
· you stop using, it or having it installed ready for use for any purpose and you expect to never use it, or
· if you have never used it, and you had it installed ready for use, you stop having it installed or you decide never to use it, or
· the holding of the asset changes or the interests of entities who hold it change.
The termination value of the depreciating asset is worked out under the table in section 40-300 of the ITAA 1997. Item two states; it is the market value of the assets when you stop using or having it installed ready for use.
In your case, you are intending to you stop using the assets once the assets have reached their effective life. You also intend to store the asset and never use them again, given these circumstances, the balancing adjustment event will occur at this point in time.
Therefore, the termination value of the assets is the market value of the asset.