Edited version of private advice

Authorisation Number: 1051559784563

Date of advice: 12 August 2019

Ruling

Subject: Extension of time to acquire replacement assets under subsection 40-365(3) of the Income Tax Assessment Act 1997

Question

Will the Commissioner allow the taxpayer a further period of time to acquire replacement assets under subsection 40-365(3) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

01 July 20XX to 30 June 20XX

The scheme commences on:

01 July 20XX

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 taxpayer's ceased to hold its depreciating assets, because they were destroyed.

The process of acquiring replacement assets and have them installed ready for use wholly for a taxable purpose would not reasonably be completed within the required timeframe under subsection 40-365(3).

The taxpayer applied for the Commissioner's discretion on an extension of time to acquire the replacement assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 40-D

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Section 40-365 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 is lost or destroyed.

Taxpayer can choose to utilise some or the entire 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.

The exclusion can only be made where they incur the expenditure on the replacement assets no later than one year, or within a further period the Commissioner allows, after the end of the income year in which the balancing adjustment occurred: section 40-365(3).

In making the choice, taxpayer must have used the replacement asset, or have it installed ready for use, wholly for a taxable purpose by the end of the income year in which they incurred the expenditure on the asset, or started to hold it: paragraph 40-365(4)(a), and the taxpayer can deduct an amount for it: paragraph 40-365(4)(b).

Chapter 3.82 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 and New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001 provides the following two examples of when the Commissioner may allow a further period under paragraph 40-365(3)(b):

·        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.

In addition, in the Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the Income Tax Assessment Act 1997? (TD 2000/40), it explains the operation of paragraph 124-75(3)(b) in relation to the capital gains tax treatment of acquired another (replacement) asset. Both the wording and the operation of paragraph 40-365(3)(b) are similar to paragraph 124-75(3)(b). TD 2000/40 provides a number of examples that the Commissioner will allow further time where special circumstances exist. The circumstances outlined in those examples are analogous to the circumstances of the current case.

In this case, the taxpayer's depreciating assets were destroyed, for which the taxpayer can choose to apply section 40-365 for involuntary disposal of the depreciating assets.

The circumstances in this case warrant an extension of time.

Should the taxpayer make the choice of using the entire amount of balance adjustment that would otherwise be including in its assessable income as reduction in the cost of the replacement assets, effect of the balancing adjustment offset is that:

·        the cost of the replacement assets will be reduced by the offset amount, for the income year of 20XX when the assets' start time occurs: paragraph 40-365(5)(a);

·        if such choice is made for two or more replacement assets, the offset amount is to be apportioned between those assets in proportion to their cost: subsection 40-365(6).