Edited version of your written advice

Authorisation Number: 1051383351301

Date of advice: 11 July 2018

Ruling

Subject: Income tax – balancing adjustment events

Question 1

Class 1 assets

1(a): Did a balancing adjustment event pursuant to section 40-295 of the Income Tax Assessment Act 1997 (ITAA 1997) occur to the Class 1 assets at the date the Receivers were appointed to Company B?

Answer

Yes

1(b): If the answer to 1(a) is no, did a balancing adjustment event pursuant to section 40-295 of the ITAA 1997 occur to the Class 1 assets at the date the parties executed the Deed?

Answer

Not applicable

1(c): If the answer to 1(a) or 1(b) is yes, was the termination value of the Class 1 assets pursuant to section 40-300 of the ITAA 1997 as at the date of the balancing adjust event nil?

Answer

Yes

Question 2

Class 2 assets

Did a balancing adjustment event pursuant to section 40-295 of the ITAA 1997 occur to the Class 2 assets at the date the Receivers were appointed to Company B?

Answer

No

Question 3

Class 3 assets

Did a balancing adjustment event pursuant to section 40-295 of the ITAA 1997 occur to the Class 3 assets at the date the Receivers were appointed to Company B?

Answer

No

Question 4

Class 4 assets

4(a): Did a balancing adjustment event pursuant to section 40-295 of the ITAA 1997 occur to the Class 4 assets at the date the Receivers were appointed to Company B?

Answer

No

4(b): On the date the Administrators issued a Form 509B Notice in respect of a Class 4 Asset, did a balancing adjustment event pursuant to section 40-295 ITAA 1997 occur to that asset?

Answer

Yes

4(c): Where a balancing adjustment event occurs because Company A stops using the Class 4 asset under paragraph 40-295(1)(b) of the ITAA 1997, is the adjustable value of those assets Value X?

Answer

Yes

4(d): Where a balancing adjustment event occurs because Company A stops using the Class 4 asset under paragraph 40-295(1)(b) of the ITAA 1997, is the termination value pursuant to section 40-300 ITAA 1997 of those assets Value Z?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2017

Income year ending 30 June 2018

The scheme commences on:

During the income year ended 30 June 2017

Relevant facts and circumstances

Both Company A and Company B are Australian incorporated companies that have common directors and shareholders. Company A owned the business assets which were used by Company B as the operating entity within the group.

Company A held these assets for the purposes of Division 40 of the ITAA 1997 and prior to October 2016, the assets were not provided under a written agreement to Company B due to the common ownership of both companies.

In early 2015 Company B borrowed funds from another entity (the Financier) pursuant to a Loan and Security Agreement (Loan Agreement). A portion of the loan funds were to purchase another business with the balance of the funds used for working capital. Pursuant to the Loan Agreement, the Financier was a secured creditor of Company B.

The operation of the Personal Property Securities Act 2009 (Cth) (the PPS Act)

The PPS Act is a law about security interests in personal property that provides for registration of eligible security interests on the Personal Property Securities Register (PPSR). The PPS Act provides a means for determining the priority of security interests and whilst registration is not mandatory, registered security interests will have priority over unregistered security interests.

Perfection is a technical concept particular to the PPS Act and is a form of protection for a secured party that is stronger than the mere attachment of their security interest. In order for a security interest to be ‘perfected’ it must be enforceable against third parties and is either registered on the PPSR or the collateral is in the possession or control of the secured party.

Given the term for which Company A actually provided the assets to Company B, and the payments made by Company B to Company A for the use of the assets, the arrangement met the definition of a ‘PPS lease’ in section 13 of the PPS Act.

Company A’s interest as a lessor under a PPS lease was a ‘security interest’ as defined in section 12 of the PPS Act. The significance of this was that, without registering its security interests under the PPS Act, possession would effectively defeat legal ownership of the assets.

The Financier’s security was also a security interest as defined in section 12 of the PPS Act. The operation of the PPS Act will therefore determine which security interest has priority over the other.

The PPS Act provides for ‘purchase money security interests’ (PMSIs) which are particular security interests which may be registered over specific assets. The PPS Act entitled Company A to register PMSIs in relation to the leases, as they were arrangements over specific assets. The Financier, who held a general security not attached to specific assets, was not able to register a PMSI for its security interest.

Pursuant to the leases, Company A registered PMSI’s over assets have been documented in this ruling.

The Financier registered its security interest under the Loan Agreement on the PPSR in early 2015.

For the purposes of the PPS Act, both Company A’s and the Financier’s security interests were ‘perfected’ when they were registered on the PPSR.

Pursuant to section 62 of the PPS Act, Company A’s PMSI would have priority over the Financier’s general security interest if it was registered within 15 business days of Company B taking possession of the secured items.

Appointment of receivers and administrators

As at mid-2017, Company B was in default under the Loan Agreement with the Financier.

On that date, pursuant to the relevant clause of the Loan Agreement, the Financier appointed receivers to Company B (the Receivers). On the same date, the Directors of both Company A and Company B appointed administrators to each company (the Administrators).

Section 420 of the Corporations Act 2001 (the CA) provides the Receivers with the power to enter into possession and take control of Company B’s property, and also to dispose of Company B’s property to pay their appointing creditor (i.e. the Financier).

When the Receivers took possession of Company B’s property they continued to operate Company B’s business, as permitted by the Loan Agreement.

Concurrent with this, the Administrators continued in their role of investigating the affairs of both Company B and Company A to present alternatives to creditors (such as handing control back to directors, executing a Deed of Company Arrangement, or placing the company into liquidation).

Pursuant to section 443A of the CA, the Administrators are personally liable for payments where the company continues to use, occupy, or remain in possession of, property owned by a third party, after a period of five business days from the date of the Administrators’ appointment. The Administrators appointed to Company A therefore became liable for payments to third party secured creditors for the equipment financed by those third parties.

Subsection 443B(3) of the CA allows the Administrators to give third party secured creditors notice (Form 509B Notice) that Company A does not propose to exercise rights over specified property. Practically, this means the property won’t be used. Whilst a Form 509B Notice is in force, the Administrators are no longer personally liable to the third party secured creditors. However, Company A remains liable.

During the period stated, the Administrators issued Form 509B notices to third party secured creditors for the assets Company A did not intend to retain and continue to use.

Third party secured creditors then took possession of the each specified asset and sold it to meet the outstanding debt in relation to the assets. This realised an amount consisting of the gross sale price before accounting for costs of disposal. Any surplus from this process was returned to Company A.

The Administrators also sold assets owned by Company A (i.e. unencumbered assets).

Company A commissioned a valuation of the assets held by Company A (the valuation) from an independent third party as at late 2016. Although prepared as at late 2016, this is the best available indication of the market value of the assets as at mid-2017 (the date the Receivers were appointed) and mid- 2017 (the date the Administrators disclaimed some assets). The valuation was used to calculate the market value of assets for the purpose of this ruling.

The Financier, the Receivers, Company A and the Administrators were in dispute as to which party had the higher priority security interests over the assets the Receivers took possession of.

Application of the PPS Act to the scheme

The Receivers (acting on behalf of the Financier) took possession of all of assets held by Company B, including the assets subject to Company A’s PMSIs.

The parties were in dispute as to who had the right to possession of the assets, as well as who had the right to dispose of the assets (and retain the proceeds from disposal).

None of Company A’s PMSIs were registered within 15 days of Company B taking possession of each asset. Therefore, Company A was unable to take advantage of the PMSI priority rule. The issue of priority fell to the ‘general’ priority rules in the PPS Act.

The PPS Act’s general priority rules are that, where competing security interests are perfected, the interest registered earliest has priority. Therefore, under the PPS Act, X of Company A’s security interests which were registered prior to early 2015 (the date the Financier registered its interest) had priority. The Financier’s security interest had priority over the balance of Company A’s security interests.

In late 2016, draft documents were prepared whereby Company A would terminate the existing lease, retake possession of the assets and lease them in accordance with a written lease agreement.

If Company A had in fact retaken possession of the assets in late 2016 and re-leased them pursuant to the draft documented lease, the PMSI would have been registered within 15 business days of Company B taking possession of the leased assets, and the PMSI priority rule would apply to give Company A’s PMSI priority over the Financier’s.

There is no evidence these documents were ever executed. Therefore, clear priority could not be established.

The Asset Allocation Deed (the Deed)

The competing claims for priorities, the need to determine whether Company A actually retook possession and re-leased the assets, and the likely cost of legal action to determine the correct application of the PPS Act led to the parties negotiating a settlement.

In late 2017 the parties executed the Deed.

The Deed dealt with several classes of assets. Each class, together with a description and detail of the agreed outcome, is contained in the following table:

The Deed’s clauses provide that the Receivers and the Financier acknowledge priority over Company A’s PPS Act security interests over the Class 3 assets; and the third party secured creditors’ PPS Act security interests over the Class 4 assets.

The Deed also refers to Class 5 assets which were to be retained by Company A. These Assets are duplicated in Classes 3 and 4 and their tax treatment is dealt with under each of those Classes.

Bank secured assets

The Bank had security over X assets in Company B’s possession in early 2017 (being the date the Receivers were appointed to Company B).

Pursuant to its loan documentation, the Bank had the right to ‘set off’ the debt owed to it from the bank accounts of both Company A and Company B. The Bank executed this right of set-off in mid-2017, and debited the amount owing from Company B’s bank account.

Pursuant to the Deed, the parties recognised that (given Company B ‘paid’ Company A’s debt owing to the Bank) Company B was subrogated to the Bank’s position as a secured creditor and was entitled to dispose of assets secured by the Bank and retain the amount owing from the proceeds.

The Receivers sold seven assets over which the Bank held security and disposed of them returning the surplus to Company A.

Impact of the transactions on Company A

As at the date the Receivers were appointed, Company A held X assets with an identified written down value (WDV).

As a result of the transactions:

a) Company A was left with X assets with a WDV as at early 2018;

b) Company A’s secured debts was repaid; and

c) Company A received an amount in cash.

From the WDV of the Class 4 assets where the Administrators issued Form 509B Notices there were total costs relating to the sale of the Class 4 assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subdivision 40B

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 40-185

Income Tax Assessment Act 1997 section 40-190

Income Tax Assessment Act 1997 section 40-285

Income Tax Assessment Act 1997 subsection 40-285(1)

Income Tax Assessment Act 1997 paragraph 40-285(1)(a)

Income Tax Assessment Act 1997 subsection 40-285(2)

Income Tax Assessment Act 1997 section 40-295

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

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

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

Income Tax Assessment Act 1997 section 40-300

Income Tax Assessment Act 1997 subsection 40-300(1)

Income Tax Assessment Act 1997 subsection 40-300(2)

Income Tax Assessment Act 1997 section 40-305

Personal Property Securities Act 2009 (Cth)

Corporations Act 2001 (Cth)

Reasons for decision

Question 1(a)

Summary

A balancing adjustment event occurred under paragraph 40-295(1)(a) of the ITAA 1997 for Company A when the Receivers were appointed as Company A stopped holding the Class 1 assets at that time.

Detailed reasoning

Division 40 of the ITAA 1997 outlines the tax treatment of depreciating assets.

The assets in this case have been used for a taxable purpose and are regarded as depreciating assets under Division 40 of the ITAA 1997.

As relevantly outlined in subsection 40-295(1) of the ITAA 1997, a balancing adjustment event occurs for a depreciating asset when:

a) you stop holding the asset; or

b) you stop using it for any purpose and you expect never to use it.

As Company A held the Class 1 assets prior to the appointment of the Receiver, a balancing adjustment event will occur if Company A stops holding the Class 1 assets, or stops using them for any purpose and expects never to use them.

Section 40-40 of the ITAA 1997 contains a table (the Hold Table) which details when an entity holds a depreciating asset. If, as a result of the Receivers’ appointment, another entity begins to hold the Class 1 assets, Company A have stopped holding the assets and a balancing adjustment event will be triggered.

Company A holds the Class 1 assets as the legal owner of the assets, pursuant to Item 10 of the Hold Table. The only other Item in the Hold Table which can be relevant to Company A’s circumstances is Item 6, which applies where:

1 An entity (the Former Holder) would hold the asset apart from the operation of Item 6; and

2 A second entity (the Economic Owner):

i) Possesses the asset, or has a right as against the Former Holder to possess the asset immediately; and

ii) Has a right as against the Former Holders which, if exercised, would make the Economic Owner the holder under any item of the Hold Table; and

3 It is reasonable to expect that the Economic Owner will become the holder to the asset by exercising that right, or that the asset will be disposed of at the direction and for the benefit of the economic owner.

In this case, Company A would be the Former Holder, and the Receivers (as agents of Company B) would be the Economic Owner. The application of each element of Item 6 is therefore:

1 Company A would (apart from Item 6) hold the Class 1 assets under Item 10 of the Hold Table as the owner of the asset;

2 The Receivers:

a) Took possession of the Class 1 assets on the date of the their appointment and therefore has possession of the assets; and

b) Have the right to retain the Class 1 assets and to obtain title to the assets which would make them the holder of the assets under Item 10 of the Hold Table; and

3 It is reasonable to expect that the Receivers will either obtain title to the Class 1 assets or will dispose of them, given that these rights are confirmed pursuant to the clauses of the Deed.

It is important to note that the Deed formalised the rights and obligations of the parties to it. It did not itself create those rights, which existed prior to execution of the Deed. Accordingly, the Receivers had the right to become the holder of the Class 1 assets on the date of their appointment.

Therefore, at the date the Receivers were appointed, they commenced holding the Class 1 assets as the Economic Owner under Item 6 of the Hold Table, and Company A stopped holding the assets. At the time Company A stopped holding the assets, a balancing adjustment event occurred under paragraph 40-295(1)(a) ITAA 1997.

Question 1(b)

Summary

A response is not required due to the answer provided above for Question 1(a).

Question 1(c)

Summary

The termination value as at the date of the balancing adjust event was nil for the Class 1 assets of Company A pursuant to section 40-300 of the ITAA 1997.

Detailed reasoning

Section 40-300 of the ITAA 1997 provides the meaning of the termination value of a depreciating asset when a balancing adjustment event occurs.

The general rule is that the termination value of the asset is the amount the taxpayer is taken to have received for the balancing adjustment event (section 40-305 of the ITAA 1997). There are specified termination values that may apply in preference to the general rules and these are set out in the table in subsection 40-300(2) of the ITAA 1997.

Item 8 of the table in subsection 40-300(2) of the ITAA 1997 applies where an asset is ‘lost or destroyed’. The phrase ‘lost or destroyed’ is not defined in the ITAA 1997, and therefore takes its ordinary meaning. The phrase ‘lost or destroyed’ is considered in the context of Capital Gains Tax in Taxation Determination TD 1999/79 which provides that the word ‘lost’ is wide enough to cover some situations where an asset is confiscated.

In the circumstances of this case, the Receivers have taken possession of the Class 1 assets, effectively confiscating them from Company A.

This is consistent with judicial consideration of the phrase ‘disposed of, lost or destroyed’ in former section 59 of the Income Tax Assessment Act 1936. The Full Federal Court considered this phrase in Bulwer Island where the Court adopted the Full High Court’s statement in Henty House:

The entire expression "disposed of, lost or destroyed" is apt to embrace every event by which property ceases to be available to the taxpayer for use for the purpose of producing assessable income, either because it ceases to be his, or because it ceases to be physically accessible to him, or because it ceases to exist.

When the Receivers took possession of the Class 1 assets, there was no prospect Company A would recover those assets and be able to use them. Therefore, the Class 1 assets were lost or destroyed and Item 8 of the table in subsection 40-300(2) of the ITAA 1997 applies to determine their termination value.

The termination value as prescribed under Item 8 is “the amount or value received or receivable under an insurance policy or other for the loss or destruction”.

In the present case, Company A has not received anything for the loss or destruction. The value of the Financier secured debt was never received nor receivable as the debt was owed by Company B, not Company A. Therefore, the termination value does not include the value of the Financier debt.

Accordingly, as no amount was received or receivable, the termination value is nil.

Question 2

Summary

A balancing adjustment event did not occur to the Class 2 assets when the Receivers were appointed to Company B as the Receivers did not satisfy Item 6 of the Hold Table in section 40-40 of the ITAA 1997 and Company A did not stop holding the Class 2 assets at that time.

Detailed reasoning

As relevantly outlined in subsection 40-295(1) of the ITAA 1997, a balancing adjustment event occurs when:

a) you stop holding the asset; or

b) you stop using it for any purpose and you expect never to use it.

As Company A held the Class 2 assets prior to the appointment of the Receiver, a balancing adjustment event will occur if Company A stops holding the Class 2 assets, or stops using them for any purpose and expects never to use them.

The Hold Table in section 40-40 of the ITAA 1997 details when an entity holds a depreciating asset. If, as a result of the Receivers’ appointment, another entity begins to hold the Class 2 assets, Company A have stopped holding the assets and a balancing adjustment event will be triggered.

Company A holds the Class 2 assets as the legal owner of the assets, pursuant to Item 10 of the Hold Table. The only other Item in the Hold Table which can be relevant to Company A’s circumstances is Item 6, which applies where:

1 An entity (the Former Holder) would hold the asset apart from the operation of Item 6; and

2 A second entity (the Economic Owner):

(a) Possesses the asset, or has a right as against the Former Holder to possess the asset immediately; and

(b) Has a right as against the Former Holders which, if exercised, would make the Economic Owner the holder under any item of the Hold Table; and

3 It is reasonable to expect that the Economic Owner will become the holder to the asset by exercising that right, or that the asset will be disposed of at the direction and for the benefit of the economic owner.

The Class 2 assets are different from the Class 1 assets dealt with above. In the case of these assets, Company A disputed the Financier’s priority over the Class 2 assets, and therefore disputed the Receiver’s rights to take possession of them. Despite the Receiver taking possession of these assets, Company A fully expected they would be returned (which they ultimately were) and confirmed in the terms of the Deed agreed.

Therefore in accordance with the Hold Table outlined above, as the Receivers did not have the right to possess the assets, they could not satisfy Item 6 of the Hold Table and would not hold the Class 2 assets. As Company A has not stopped holding the Class 2 assets, no balancing adjustment event occurred.

Question 3

Summary

A balancing adjustment event pursuant to section 40-295 of the ITAA 1997 did not occur to the Class 3 assets at the date the Receivers were appointed to Company B. The Receivers did not satisfy Item 6 of the Hold Table in section 40-40 of the ITAA 1997 and Company A did not stop holding the Class 3 assets at that time.

Detailed reasoning

As relevantly outlined in subsection 40-295(1) of the ITAA 1997, a balancing adjustment event occurs when:

a) you stop holding the asset; or

b) you stop using it for any purpose and you expect never to use it.

As Company A held the Class 3 assets prior to the appointment of the Receiver, a balancing adjustment event will occur if Company A stops holding the Class 3 assets, or stops using them for any purpose and expects never to use them.

The Hold Table on section 40-40 of the ITAA 1997 details when an entity holds a depreciating asset. If, as a result of the Receivers’ appointment, another entity begins to hold the Class 3 assets, Company A have stopped holding the assets and a balancing adjustment event will be triggered.

Company A holds the Class 3 assets as the legal owner of the assets, pursuant to Item 10 of the Hold Table. The only other Item in the Hold Table which can be relevant to Company A’s circumstances is Item 6, which applies where:

1 An entity (the Former Holder) would hold the asset apart from the operation of Item 6; and

2 A second entity (the Economic Owner):

(a) Possesses the asset, or has a right as against the Former Holder to possess the asset immediately; and

(b) Has a right as against the Former Holders which, if exercised, would make the Economic Owner the holder under any item of the Hold Table; and

3 It is reasonable to expect that the Economic Owner will become the holder to the asset by exercising that right, or that the asset will be disposed of at the direction and for the benefit of the economic owner.

In the circumstances of this case, the clauses of the Deed provides that the Receivers and the Financier explicitly acknowledge the priority of Company A’s PPS Act security interests over the Class 3 assets. The Receivers, whilst they took possession of the Class 3 assets, never had rights as against Company A which would make them the holder of these assets. Accordingly, Company A did not stop holding the Class 3 assets, and no balancing adjustment event occurred.

Question 4(a)

Summary

A balancing adjustment event pursuant to section 40-295 of the ITAA 1997 did not occur to the Class 4 assets at the date the Receivers were appointed to Company B. The Receivers did not satisfy Item 6 of the Hold Table in section 40-40 of the ITAA 1997 and Company A did not stop holding the Class 4 assets at that time.

Detailed reasoning

As relevantly outlined in subsection 40-295(1) of the ITAA 1997, a balancing adjustment event occurs when:

a) you stop holding the asset; or

b) you stop using it for any purpose and you expect never to use it.

As Company A held the Class 4 assets prior to the appointment of the Receiver, a balancing adjustment event will occur if Company A stops holding the Class 4 assets, or stops using them for any purpose and expects never to use them.

The Hold Table in section 40-40 of the ITAA 1997 details when an entity holds a depreciating asset. If, as a result of the Receivers’ appointment, another entity begins to hold the Class 4 assets, Company A have stopped holding the assets and a balancing adjustment event will be triggered.

Company A holds each of the Class 4 assets. This would be the case where the asset was acquired by Company A and subject to finance (under Item 10 of the Hold Table) and where the asset was subject to a hire purchase arrangement (under Item 6 of the Hold Table). Company A holds the Class 4 assets subject to the PPS Act registered security interests of the various secured creditors.

When the Receivers are appointed, the only item in the Hold Table which could change the holder of the Class 4 assets and trigger a balancing adjustment event is Item 6, which applies where:

1 An entity (the Former Holder) would hold the asset apart from the operation of Item 6; and

2 A second entity (the Economic Owner):

(a) Possesses the asset, or has a right as against the Former Holder to possess the asset immediately; and

(b) Has a right as against the Former Holders which, if exercised, would make the Economic Owner the holder under any item of the Hold Table; and

3 It is reasonable to expect that the Economic Owner will become the holder to the asset by exercising that right, or that the asset will be disposed of at the direction and for the benefit of the economic owner.

In the circumstances of this case, the clauses of the Deed provides that the Receivers and the Financier explicitly acknowledge the third party secured creditors’ PPS Act security interests over the Class 4 assets. Although these interests were registered by third parties, and not Company A, the Receivers still had no right to the Class 4 assets which would make them the holder under the Hold Table. Accordingly, Company A did not stop holding the Class 4 assets, and no balancing adjustment event occurred.

Question 4(b)

Summary

A balancing adjustment event pursuant to section 40-295 of the ITAA 1997 did occur to the Class 4 Asset on the date the Administrators issued a Form 509B Notice in respect of the Class 4 Asset.

Detailed reasoning

As relevantly outlined in subsection 40-295(1) of the ITAA 1997, a balancing adjustment event occurs when:

a) you stop holding the asset; or

b) you stop using it for any purpose and you expect never to use it.

In the circumstances of this case, over the period end June to mid-2017, the Administrators issued Form 509 Notices to secured creditors where Company A did not intend to retain the relevant asset, advising the creditor that Company A will cease to use or occupy the asset with effect from the date of the Form 509B Notice.

When the Form 509B Notices are issued, Company A expressly states that it will cease to use or occupy the asset. Having stopped using the asset by notifying the secured creditor, Company A stops using the asset for any purpose and can never expect to use that asset again. Accordingly, a balancing adjustment event occurs pursuant to paragraph 40-295(1)(b) of the ITAA 1997 where the Administrator issues the Form 509B Notice.

Where the Administrators directly sell the Class 4 assets, a transfer of legal title occurs and the purchaser becomes the legal owner, and therefore the holder of the asset pursuant to Item 10 of the Hold Table. At that point, Company A ceases to hold the asset, and a balancing adjustment event occurred pursuant to paragraph 40-295(1)(a) of the ITAA 1997.

Question 4(c)

Summary

Where a balancing adjustment event occurs because Company A stops using the Class 4 asset under paragraph 40-295(1)(b) of the ITAA 1997, the adjustable value of those assets will be Value X.

Detailed reasoning

You work out the balancing adjustment amount by comparing the asset's termination value and its adjustable value at the time of the balancing adjustment event.

An amount is included in your assessable income under subsection 40-285(1) of the ITAA 1997 if the asset's termination value is more than its adjustable value just before the event occurred.

An amount is included as an allowable deduction under subsection 40-285(2) of the ITAA 1997 if the asset’s termination value is less than its adjustable value just before the event occurred.

Paragraph 40-285(1)(a) of the ITAA 1997 prescribes that the decline in value of the asset was worked out under Subdivision 40-B or what you would have worked out under that Subdivision if you had used the asset.

In the circumstances of this case, the WDV of Class 4 assets were identified as at the date of the balancing adjustment event. This is the first element of the Class 4 assets’ cost pursuant to section 40-185 of the ITAA 1997. In addition to this, costs were incurred in relation to disposing of the assets. The costs form part of the second element of the Class 4 assets’ cost pursuant to section 40-190 of the ITAA 1997 as expenditure you incur that is reasonably attributable to a balancing adjustment event occurring for the asset.

Therefore, in accordance with section 40-285 of the ITAA 1997 the adjustable value of the Class 4 assets is the sum of their WDV and the costs relating to their disposal, which is approximately Value X.

Question 4(d)

Summary

Where a balancing adjustment event occurs because Company A stops using the Class 4 asset under paragraph 40-295(1)(b) ITAA 1997, the termination value pursuant to paragraph 40-300(1)(a) ITAA 1997 of those assets will be Value Z.

Detailed reasoning

Section 40-300 of the ITAA 1997 provides the meaning of the termination value of the asset when a balancing adjustment event occurs.

Subsection 40-300(1) provides that the termination value of a depreciating asset is either:

a) If the balancing adjustment event falls within one of the items listed in the table in subsection 40-300(2) – the amount specified in that item; or

b) Otherwise – the amount that you are taken to have received for the asset under section 40-305.

Item 1 in the table in subsection 40-300(2) of the ITAA 1997 applies where you stop using a depreciating asset, or having it installed ready for use, for any purpose and you expect never to use it again even though you still hold it.

This applies to the Class 4 assets. At the time the Administrators issue each Form 509B Notice, Company A still held the asset that Notice relates to. Issuing the Notice constitutes Company A ceasing its use, whilst still holding the asset.

Therefore, Item 1 the table in subsection 40-300(2) of the ITAA 1997 will apply and the termination value will be the market value of the asset as at the date the Form 509B Notices are issued. The phrase ‘market value’ is not defined in the ITAA 1997, and therefore takes its ordinary meaning.

When the Class 4 assets were sold (by the secured creditors, or by the Administrators) they realised a total amount being the gross sale price before accounting for costs of disposal. Company A considers this is the appropriate market value of the Class 4 assets.

Information provided on the ATO’s website for valuation methods provides that:

To determine the market value, you should use the most appropriate valuation method. Where comparable arm's length sales data is available (for example, in a market for a commodity product), this is generally considered the most appropriate method.

In the present case, there is arm’s length sales data for the assets themselves when the third party secured creditors sold the assets. These sales were concluded shortly after the balancing adjustment event, and represent that actual market value of the assets. Therefore, the termination value of Class 4 assets will be Value Z.