Edited version of private advice

Authorisation Number: 1051779017281

Date of advice: 10 November 2020

Ruling

Subject: Capital allowances - balancing adjustment

Question

Does a balancing adjustment event occur under subsection 40-295(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) when Company A makes the choice under paragraph 40-295(1A)(c) in respect of interests it holds in mining, quarrying or prospecting rights (Permit interests)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

00 Month 20XX

Relevant facts and circumstances

•   Company A is the head company of an Australian tax consolidated group (the Group).

•   Company B is a wholly owned subsidiary member of the Group.

•   Company B purchased interests in a mining, quarrying or prospecting right from a third party (non-Government).

•   For tax purposes company A is taken to hold the Permit Interests.

•   Company A has not budgeted for work that falls outside of the minimum work requirements of the Permit Interests.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-295

Reasons for decision

Summary

A balancing adjustment under subsection 40-295(1A) will occur in relation to Company B's Permit Interests when Company A makes a choice under paragraph 40-295(1A)(c).

Detailed Reasoning

It is considered that the Permit Interests are depreciating assets (section 40-30) and Company A is the holder under item 10 of the table in section 40-40.

Requirements of paragraph 40-80(1)

In order for subsection 40-295(1A) to apply, paragraph 40-295(1A)(a) states that:

•   subsection 40-80(1) must not apply; and

•   the only reason for it not applying is the requirements in paragraph 40-80(1)(d) or (e) are not met.

It is considered that the requirements of paragraphs 40-80(1)(a), (b) and (c) have been satisfied. The interests in the Permit Interests were acquired from an entity that is not a Government Agency or entity therefore paragraph 40-80(1)(d) does not apply. Paragraph 40-80(1)(e) is not relevant.

The requirements of paragraph 40-295(1A)(a) are met.

Has Company A Budgeted or Planned for further expenditure?

Paragraph 40-295(1A)(b) sets out that the taxpayer is required to have neither budgeted nor planned for further expenditure that will relate to the tenement to which the right relates; and will exceed the minimum expenditure required to maintain the tenement.

The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2014 Measures No.3) Bill 2014, (the EM) which introduced the amendments to subsection 40-295(1A), states at paragraph 1.48:

The minimum expenditure necessary to satisfy the conditions for being allowed to continue to hold a mining right will vary and will depend on the conditions of the mining right and jurisdiction in which the minerals lie. The taxpayer must have not budgeted or planned to incur more expenditure than the minimum required to satisfy those conditions in order to choose for the balancing adjustment event to operate.

Company A have not budgeted for further expenditure that relates to the Permit Interests that would exceed the minimum expenditure required to maintain the tenements.

Has Company A chosen to apply this subsection to the right or information?

Section 40-130 states that a choice made under Division 40 must be made by the day the tax return is lodged for the income year to which the choice relates. Company A will make a choice under paragraph 40-295(1A)(c) with effect from 00 Month 20XX to apply subsection 40-295(1A) from the date it lodges its 20XX income year tax return.

Therefore, Company A will be entitled to obtain a balancing adjustment as all of the requirements of subsection 40-295(1A) have been met.