Edited version of your private ruling

Authorisation Number: 1012477672354

Ruling

Subject: Tax treatment of sale proceeds

Question 1

Is consideration received on the sale of a water facility, whose decline in value was worked out under Subdivision 40-F of the Income Tax Assessment Act 1997 (ITAA 1997), assessable under Division 40 of the ITAA 1997 as a balancing adjustment?

Answer

No

Question 2

Is consideration received on sale of a water facility, whose decline in value was worked out under Subdivision 40-F of the ITAA 1997, assessable under the capital gains tax provisions?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

The entity purchased a water facility.

The entity claimed a deduction for depreciation over the next three years.

The entity sold the water facility for an amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-520.

Income Tax Assessment Act 1997 section 40-295.

Income Tax Assessment Act 1997 section 40-285.

Income Tax Assessment Act 1997 subsection 40-50(1).

Income Tax Assessment Act 1997 subsection 40-515(1).

Income Tax Assessment Act 1997 subsection 118-24(1).

Reasons for decision

Summary

There is a balancing adjustment event on the sale of the water facility but it is not included in your assessable income under Division 40. The sale of the water facility is not disregarded for capital gains tax purposes.

Detailed reasoning

Balancing Adjustment

Division 40 of the ITAA 1997 states you can deduct an amount equal to the decline in value of a depreciating asset (an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used) that you hold.

Subdivision 40-F of the ITAA 1997 states you can deduct amounts for capital expenditure on depreciating assets that are water facilities.

Section 40-520 of the ITAA 1997 describes a water facility in part as plant or a structural improvement, or a repair of a capital nature, or an alteration, addition or extension, to plant or a structural improvement, that is primarily and principally for the purposes of conserving or conveying water.

A balancing adjustment event occurs, for a depreciating asset which you have used, under subsection 40-295(1) of the ITAA 1997 when you stop holding the asset or 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 dispose of a depreciating asset.

You must work out a balancing adjustment under section 40-285 of the ITAA 1997 if a balancing adjustment event occurs for a depreciating asset that you hold and the decline in value of the asset is worked out under Subdivision 40-B of the ITAA 1997.

Subsection 40-50(1) of the ITAA 1997 provides that Subdivision 40-B of the ITAA 1997 does not apply where a taxpayer can work out the decline in value of a depreciating asset under Subdivision 40-F of the ITAA 1997. This is because subsection 40-50(1) gives precedence for the deduction to Subdivisions 40-F over Subdivision 40-B.

In your case you claimed depreciation expenses for the decline in value of the water facility under subsection 40-515(1) of the ITAA 1997. You then sold the water facility and received an amount.

You claimed depreciation under Subdivision 40-F and not under Subdivision 40-B therefore, even though there was a balancing adjustment event, Subdivision 40-D does not apply to you.  

Capital Gains Tax

While the income from the sale of a water facility is not included in your assessable income as a result of a balancing adjustment, the sale may result in a capital gain or a capital loss under Part 3-1 of the ITAA 1997.

Subsection 118-24(1) of the ITAA 1997 disregards a capital gain or capital loss you make from a CGT event (that is also a balancing adjustment event) that happens to a depreciating asset you held, where the decline in value of the assets was or would have been worked out under Division 40 of the ITAA 1997. However, paragraph 118-24(2)(b) of the ITAA 1997 specifies that subsection 118-24(1) does not apply to a depreciating asset for which you or another entity has deducted or can deduct amounts under Subdivision 40-F of the ITAA 1997. Paragraph 118-24(2)(b) is applicable in relation to CGT events happening on or after 1 July 2001.

In your case the sale of the water facility is not disregarded for capital gains tax purposes under subsection 118-24(1) as you have deducted amounts for the decline in value under Subdivision
40-F.

Section 110-45 of the ITAA 1997 discusses what does not form part of the cost base for assets acquired after 13 May 1997. Expenditure (except second or third element of the cost base) does not form part of the cost base to the extent that you have deducted or can deduct it for an income year (there are however exceptions to this).