Edited version of your private ruling

Authorisation Number: 1012466786747

Ruling

Subject: Capital Gains Tax and sale of depreciating assets

Question 1

Will the Capital Gains Tax (CGT) provisions apply to the sale of plant and equipment pursuant to section 118-24 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will Subdivision 40-D of the ITAA 1997 apply to the sale of plant and equipment?

Answer

Yes

This ruling applies for the following periods:

1 July 2012 - 30 June 2013

1 July 2013 - 30 June 2014

The scheme commences on:

To be determined once the ruling has issued.

Relevant facts and circumstances

The Trust is a discretionary trust that was originally established for the purpose of asset protection.

The plant and equipment held by the trust are classified as depreciating assets and are depreciable under the decline in value provisions (Division 40 of the ITAA 1997).

Since the trust was established, it has licensed the plant and equipment to a related entity on an arm's length basis. The equipment has been used by this entity for income producing activities.

The trust has never held the plant and equipment as trading stock.

The trust is proposing to dispose of all the plant and equipment to the other entity at market value.

An independent valuation will be obtained of the plant and equipment prior to sale to ascertain the market value at disposal date and to ensure an arm's length transaction.

Once all the plant and equipment is disposed of, the trust is proposing to pay any outstanding liabilities owed by it.

Once this is done the trust will be vested.

The trust is not entitled to small business roll-over tax concessions.

The Trust is not a primary producer nor does it hold any primary producing depreciating assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-24.

Income Tax Assessment Act 1997 Section 40-295(1)

Income Tax Assessment Act 1997 Section 40-295(2)

Income Tax Assessment Act 1997 Section 40-295(3)

Income Tax Assessment Act 1997 Section 104-235

Income Tax Assessment Act 1997 Section 40-340.

Income Tax Assessment Act 1997 Section 42-285.

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subdivision 40-F

Income Tax Assessment Act 1997 Subdivision 40-G

Income Tax Assessment Act 1997 Subsection 104-185(1)

Income Tax Assessment Act 1997 Subsection 104-235(1)

Income Tax Assessment Act 1997 Section 118-24

Income Tax Assessment Act 1997 Section 995-1

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

Income Tax Assessment Act 1997 Section 104-240

Income Tax Assessment Act 1997 Section 104-245

Income Tax Assessment Act 1997 Section 40-40

Reasons for decision

Issue 1

Question 1

Summary

No the sale of the depreciating assets will not fall under the CGT provisions.

Detailed reasoning

Section 118-24 of the ITAA 1997 provides that a taxpayer disregards a capital gain or loss that arises from a CGT event that happens to a depreciating asset, where its decline in value was worked out under Division 40 of the ITAA 1997. That is, if a business asset was depreciated under Division 40, any capital gain or loss that would otherwise be brought to account is disregarded. Instead, a balancing adjustment is calculated in accordance with section 40-285 of the ITAA 1997.

Subsection 104-185(1) of the ITAA 1997 contains the rules dealing with CGT event J2 and states that a CGT event J2 happens if you choose a small business roll-over under Subdivision 152-E for a CGT event that happens in relation to a CGT asset in an income year.

Subsection 104-235(1) of the ITAA 1997 contains the rules dealing with CGT event K7.

CGT event K7 happens if:

(a) a balancing adjustment event occurs for a depreciating asset held by the taxpayer; and

(b) at some time while the taxpayer held the asset, the taxpayer used it or had it installed ready for use for a purpose other than a taxable purpose.

Unless the conditions of CGT event K7 are satisfied, any capital gain or loss arising from a CGT event that is also a balancing adjustment event for a depreciating asset is disregarded if the decline in value of the asset was worked out under Division 40 of the ITAA 1997 or Division 328, or would have been if the asset had been used. In particular, there are no CGT consequences from a balancing adjustment event if the depreciating asset was wholly used for a taxable purpose (in such a case, only the balancing adjustment provisions in subdivision 40-D would apply).

Subdivision 40-F allows primary producers to deduct amounts for capital expenditure on depreciating assets that are water facilities, horticultural plants or grapevines. Subdivision 40-G allows primary producers and other landholders to deduct amounts for capital expenditure incurred on land care operations or on electricity connections or telephone lines.

It is not intended that the balancing adjustment provisions of Subdivision 40-D apply where a deduction has been available for an asset under Subdivision 40-F or 40-G (see ITAA 1997 section 40-285 and section 118-24).

Your Situation

In the statement of facts provided to us, you have informed us of the following:

· the depreciating assets held by the trust that are being disposed of have been depreciated under Division 40 of the ITAA 1997.

Therefore subsection 118-24(1) will disregard any capital gain or loss made from the disposal of the equipment.

· the trust is not eligible for any small business tax roll-over tax concessions.

Therefore CGT event J2 will not apply to the disposal of the depreciating assets by the trust.

· the result will be a balancing adjustment but the equipment has always been used for a taxable purpose.

In this case, CGT event K7 will not apply to the disposal of the equipment by the trust.

· The trust is not a primary producer nor does the Trust hold any primary producing depreciating assets.

Therefore subsection 118-24(2)(b) of the ITAA 1997 does not apply as subdivisions 40-F or 40-G are not applicable.

It can therefore be concluded that the disposal of the depreciating assets from the Trust to the other entity will not trigger a CGT event and neither a capital gain nor capital loss will occur pursuant to section 118-24 of the ITAA 1997.

Question 2

Summary

Yes subdivision 40-D will apply to the proposed sale of the plant and equipment.

Detailed reasoning

Depreciating assets:

The deductions for decline in value of the depreciation of assets under the income tax legislation provide a basis for writing off the capital cost of plant and articles over their estimated life. These provisions are contained in Division 40 of the ITAA 1997.

Section 40-25 of the ITAA 1997 allows you to deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. Generally, the Commissioner will accept a calculation for decline in value that is based on:

· an independent valuation that establishes reasonable values for depreciating assets, or

· circumstances where you have demonstrated that your estimate establishes a reasonable value.

Balancing adjustments are made to ensure that a taxpayer's total deductions for the decline in value of a depreciating asset, combined with any balancing adjustments, correspond to the taxpayer's actual loss arising from the acquisition and later disposal of the asset. In effect, balancing adjustments correct the situation where too much or too little has been allowed for depreciation of the asset while the taxpayer held it. If roll-over relief is available under section 40-340 of the ITAA 1997, no balancing adjustment is required to be made as a result of the balancing adjustment event.

Subsection 40-285(1)  of the ITAA 1997 states the following:

"An amount is included in your assessable income if:

(a) a balancing adjustment event occurs for a depreciating asset you held and:

(i) whose decline in value you worked out under Subdivision 40-B; or

(ii) whose decline in value you would have worked out under that Subdivision if you had used the asset; and

(b) the asset's termination value is more than its adjustable value just before the event occurred.

The amount included is the difference between those amounts, and it is included for the income year in which the balancing adjustment event occurred".

The term depreciating assets is defined in section 995-1 of the ITAA 1997 as having the meaning given to it in subsection 40-30(1) of the ITAA 1997, where it is defined as an asset that has a limited effective life and that can reasonably be expected to decline in value over the time it is used, with some exceptions. You have stated to us that the assets in this matter satisfy the definition of depreciating assets as they are expected to decline in value over the time they are used.

The term hold is defined in section 995-1 of the ITAA 1997 for the current purposes, as having the meaning given to it by section 40-40 of ITAA 1997. Section 40-40 ITAA 1997 explains the meaning of "hold a depreciating asset". A taxpayer that buys a depreciating asset used in the business will ordinarily be taken to hold that asset as soon as they become the owner of the asset under relevant contract of sale.

Subsection 40-285(2) of the ITAA 1997states the following:

You can deduct an amount if:

(a) a balancing adjustment event occurs for a depreciating asset you held and:

(i) whose decline in value you worked out under Subdivision 40-B; or

(ii) whose decline in value you would have worked out under that Subdivision if you had used the asset; and

(b) the asset's termination value is less than its adjustable value just before the event occurred.

The amount you can deduct is the difference between those amounts, and you can deduct it for the income year in which the balancing adjustment event occurred".

You work out the balancing adjustment amount by comparing the assets termination value (such as the proceeds from the sale of an asset) and its adjustable value at the time of the balancing adjustment event.

If the termination value is greater than the adjustable value, you include the excess in your assessable income.

If the termination value is less than the adjustable value, you can deduct the difference as a deduction.

The termination value is, generally, what you receive or are taken to receive for the asset when a balancing adjustment event occurs. It is made up of amounts you receive and the market value of non-cash benefits (such as goods or services) you receive for the asset.

Subsection 40-295 (1) of the ITAA 1997 states that a balancing adjustment event occurs for a depreciating asset if:

(a) you stop holding the asset; or

(b) you stop using it, or having it ^*installed ready for use, for any purpose and you expect never to use it, or have it installed ready for use, again; or

(c) you have not used it and:

(i) if you have had it installed ready for use - you stop having it so installed; and

(ii) you decide never to use it.

Subsection 40-295 (2) of the ITAA 1997 states that a balancing adjustment event occurs for a depreciating asset if:

(a) for any reason, a change occurs in the holding of, or in the interests of entities in, the asset; and

(b) the entity or one of the entities that had an interest in the asset before the change has an interest in it after the change; and

(c) the asset was a partnership asset before the change or becomes one as a result of the change.

Subsection 40-295 (3) of the ITAA 1997 states that a balancing adjustment event does not occur for a depreciating asset merely because you split it into 2 or more depreciating assets or you merge it with one or more other depreciating assets, however, a balancing adjustment event will occur if you stop holding part of a depreciating asset.

Where the decline in value is calculated for an individual asset (rather than a pooled asset), i.e. the ''general case'', any capital gain or loss is calculated in accordance with the rules in section 104-240 of the ITAA 1997.

Where the decline in value is calculated for a pooled asset (rather than an individual asset), i.e. where a depreciating asset was allocated to a low-value pool and the balancing adjustment event happens for the pooled asset, any capital gain or loss is calculated in accordance with the rules in section 104-245 of the ITAA 1997.

Your Situation

In the statement of facts provided to us, you have informed us of the following:

· The Trust will cease to hold the depreciating assets when it sells the assets to the other entity and a balancing adjustment will occur.

As a balancing adjustment event has occurred, subsection 40-295(1)(a) of the ITAA 1997 will have occurred.

· The Trust has calculated the decline in value on the depreciating assets which are to be disposed of under Subdivision 40-D of the ITAA 1997 and will give either a gain or loss on disposal.

As a balancing adjustment event has occurred the resulting loss or gain will be treated as either an allowable deduction or assessable income pursuant to section 40-285 of the ITAA 1997 as the assets have been calculated using the decline in value on depreciating assets as set out in subdivision 40-D of the ITAA 1997.

Based on the above, it can be concluded that subdivision 40-D of the ITAA 1997 will apply to the proposed sale of the plant and equipment.