Edited version of private advice

Authorisation Number: 1052206354734

Date of advice: 11 April 2024

Ruling

Subject: Apportionment of property sale proceeds

Question 1

Was the Trust the holder of Division 40 assets under item 10 in section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Did a balancing adjustment event occur at the time of the property settlement under section 40-295 of the ITAA 1997 in respect of the Division 40 depreciating assets that were sold by the Trust as part of the Property sale?

Answer

Yes

Question 3

Are the capital proceeds received by the Trust in respect of the sale of the Property apportioned between the CGT assets and Division 40 depreciating assets under section 40-310 of the ITAA 1997?

Answer

Yes

Question 4

Where a balancing adjustment event occurs, is the termination value of the Division 40 depreciating assets in respect of the sale of the Property equal to the market value under section 40-310 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

•        The Trust acquired the Property in XX. The Property is a retail complex which is leased to various retail tenants.

•        The Trust entered into a Contract for Sale on X June 20XX to dispose of the Property. Settlement occurred on X June 20XX.

•        The Contract for Sale of the Property included clauses that defined the Inclusions for the sale, which included fittings, fixtures and chattels at the property on the Contract Date owned by the vendor.

•        The Contract for Sale did not allocate the sale price between:

­        The land and buildings, being the CGT assets, which gives rise to CGT event A1, and

­        The fittings, fixtures and chattels owned by the vendor (identified as the Inclusions above), being the Division 40 depreciating assets and which gives rise to a balancing adjustment.

•        The Contract for Sale did not provide a listing of the fittings, fixtures and chattels that were included as part of the Property sale. For the purposes of this Ruling, the Inclusions did not include any Division 43 capital works.

•        The Trust and the Purchaser are not related parties and were dealing on an arm's length basis in respect to this transaction.

•        The Trust held the Property on capital account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

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

Income Tax Assessment Act 1997 subsection 40-30(2)

Income Tax Assessment Act 1997 subsection 40-30(3)

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 40-195

Income Tax Assessment Act 1997 section 40-295

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

Income Tax Assessment Act 1997 section 40-310

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Question 1

The Trust was the holder of the Division 40 assets under item 10 in section 40-40 of the ITAA 1997.

Detailed reasoning

A depreciating asset is defined in subsection 40-30(1) of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. However, land, trading stock and intangible assets (except those mentioned in subsection 40-30(2)) are excluded from this definition.

Under subsection 40-30(3) of the ITAA 1997, Division 40 will also apply to an asset that is an improvement to land or a fixture on land, whether the improvement or fixture is removable or not, if the asset falls within the definition in subsection 40-30(1) and is not capital works for which amounts can be deducted under Division 43.

The Contract for Sale of the Property included the Inclusions which covered the fittings, fixtures and chattels at the property on the contract date that were owned by the Trust.

To the extent that the Inclusions meet the definition above, they will be considered as Division 40 depreciating assets.

To determine who holds an asset, the table in section 40-40 of the ITAA 1997 must be referred to. Items 1 to 9 of the table do not apply to the Inclusions because, broadly, they are not:

•        leased luxury cars (item 1)

•        assets on leased land (items 2-3)

•        other leased assets (item 4)

•        assets subject to a right to purchase (items 5-6)

•        partnership assets (item 7), or

•        mining, quarrying or prospecting information (items 8-9).

Where none of these specific items apply, item 10 of the table applies and a depreciating asset is held by the owner of the asset, or the legal owner if there is both a legal and equitable owner.

In this instance, the Trust is the legal owner of the Inclusions and therefore the holder of these Division 40 assets.

Question 2

A balancing adjustment event occurred at the time of the property settlement under section 40-295 of the ITAA 1997 in respect of the Division 40 depreciating assets that were sold by the Trust as part of the Property sale.

Detailed reasoning

Under paragraph 40-295(1)(a) of the ITAA 1997 a balancing adjustment event occurs for a depreciating asset if the taxpayer stops holding the asset. A taxpayer will stop holding a depreciating asset in various circumstances including when it is disposed of or sold.

The Trust disposed of the Inclusions, being the Division 40 depreciating assets, to the Purchaser as part of the sale of the Property. The disposal of these assets occurred on the settlement date of X June 20XX. This was the time when the Trust ceased to hold the assets as the legal owner as per section 40-40 of the ITAA 1997.

Question 3

The capital proceeds received by the Trust in respect of the sale of the Property are apportioned between the CGT assets and Division 40 depreciating assets under section 40-310 of the ITAA 1997.

Detailed reasoning

Section 40-310 of the ITAA 1997 states:

If you receive an amount for 2 or more things that include a *balancing adjustment event occurring for a *depreciating asset, you take into account as its *termination value only that part of what you received that is reasonably attributable to the asset.

The Contract for Sale of the Property did not allocate the sale price between:

•        the land and buildings, being the CGT assets, and

•        the Inclusions, being the Division 40 depreciating assets, which give rise to a balancing adjustment as per question 2.

Therefore, section 40-310 of the ITAA 1997 requires the Trust to apportion the capital proceeds received from the sale of the Property between the CGT assets and Division 40 assets. The amount allocated to the Division 40 assets is the amount of the capital proceeds reasonably attributable to those assets.

Question 4

The termination value of the Division 40 depreciating assets for each balancing adjustment event in respect of the sale of the Property is equal to the market value under section 40-310 of the ITAA 1997.

Detailed reasoning

As per question 3, the Contract for Sale of the Property did not allocate the sale price between the land and buildings, and the Division 40 assets. Under section 40-310 of the ITAA 1997 the termination value of the Division 40 assets should be based on a reasonable attribution of the sale price.

The Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (EM) provides in relation to section 40-310 of the ITAA 1997:

3.65 If a payment is for several things that include a balancing adjustment event that occurs for a depreciating asset, only the reasonable part of it is treated as being for that event it covers. That is, the termination value will be apportioned between the balancing adjustment event for the asset and those other things ...

Example 3.9

Luke receives $100,000 for the sale of both a chainsaw (a depreciating asset) and a block of land (not a depreciating asset). The $100,000 will be apportioned between:

•        the termination value of the chainsaw; and

•        the proceeds of sale for the land,

based on the relative market values of the chainsaw and the land.

Consistent with the above is the Commissioner's views in TD 98/24[1]:

5. In the absence of an agreed allocation, each party needs to make their own reasonable apportionment of the capital proceeds to the separate assets. In making this apportionment, it is expected that each party would generally have regard to, and be able to justify, their reasonable apportionment based on the relevant market values of the separate assets at the time of the making of the contract.

In Case C112 (1952) 3 TBRD a building was acquired for a lump sum payment without an allocation provided between the building and the lifts within. Expert evidence was conflicting, so the Board determined that an appropriate methodology was to allocate the purchase price in proportion to the original costs of constructing the building and lifts. The requirement to apportion the cost of a depreciating asset on a reasonable basis where no allocation is made under section 40-195 of the ITAA 1997 aligns with the methodology for termination value under section 40-310 of the ITAA 1997.

However, where acceptable expert evidence on market values can be obtained it should be adopted in preference to a formula approach. In Case D11 (1953) 4 TBRD, a bus proprietor sold a licensed bus service together with vehicles and other assets. Initially, the taxpayer adopted the depreciated value for the vehicles while the Commissioner used a significantly higher figure based on the purchaser's records. The taxpayer later obtained a detailed valuation from a witness who, while not an approved valuer, was an expert on the vehicles in question. The Board held that this latter valuation should be accepted.

Where multiple valuations are presented, it may be appropriate in some instances to select an average valuation. In Case K29 (1959) 10 TBRD a taxpayer purchased, for an undivided sum, a business which included machinery. The Board was presented with three valuations for the machinery, two directly from witnesses and the third from an employee of a company which manufactured similar machinery. As there were some discrepancies in the machinery specifications and no compelling evidence to select one valuation over another, the Board decided to take an average of the three valuations.

You have submitted that a reasonable apportionment for the purposes of determining the 'termination value' of the Inclusions subject to the balancing adjustment event would be the market value of the Division 40 assets at the time of settlement.

This market value would be determined based on the tax written down value of the Division 40 assets as per the Quantity Surveyor's Report (QS Report) that the Trust previously obtained upon acquisition of the Property, with the balance of sale proceeds allocated to the land and buildings.

The Commissioner accepts that where the tax values per the QS Report align with the market value of the Division 40 assets then the proposed allocation is both reasonable and consistent with the EM example to section 40-310 of the ITAA 1997, TD 98/24 and case law. However, care must be taken with this method, as per TD 98/24:

6. It should be noted that the written down values of depreciable assets are not necessarily their market values.

[1] Taxation Determination TD 98/24 Income tax: capital gains: what are the CGT consequences of a CGT event happening to post-CGT real property if the property comprises separate CGT assets under Subdivision 108-D in Part 3-1 of the Income Tax Assessment Act 1997 (the 1997 Act) or if the property is sold with depreciable assets?