ATO Interpretative Decision
ATO ID 2003/186
Income Tax
Capital Allowances: assessable balancing adjustment if a depreciating asset is not usedFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is a taxpayer required to include an amount in assessable income under subsection 40-285(1) of the Income Tax Assessment Act 1997 (ITAA 1997) without any reduction under section 40-290 of the ITAA 1997 if a depreciating asset that was acquired for use for a taxable purpose is sold for more than its cost before it is used, or installed ready for use, for any purpose?
Decision
Yes. If a depreciating asset is sold before it has been used, or installed ready for use, for more than its cost an amount must be included in assessable income under subsection 40-285(1) of the ITAA 1997. Section 40-290 of the ITAA 1997 will not reduce the amount to be included.
Facts
A taxpayer purchased a number of machines, as part of a bona fide plan to establish a business. The machines were delivered to the taxpayer's premises, but put aside until refurbishment of the premises was completed and the equipment could be installed. During the refurbishment process, the taxpayer's application to local council to operate the business was not approved and the taxpayer was unable to go ahead with the plan. Each machine was subsequently sold for more than its cost. For example, a machine that cost $5,000 was sold for $6,000.
Reasons for Decision
An amount is included in assessable income under subsection 40-285(1) of the ITAA 1997 if:
- a)
- a balancing adjustment event occurs for a depreciating asset that was held and:
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- whose decline in value was worked out under Subdivision 40-B of the ITAA 1997, or
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- whose decline in value would have been worked out under that Subdivision if it had been used; and
- b)
- the asset's termination value is more than its adjustable value just before the event occurred.
- The amount to be included is the difference between those amounts.
Subsection 40-290(1) of the ITAA 1997 reduces the amount worked out under section 40-285 of the ITAA 1997 if deductions for the decline in value for the depreciating asset have been reduced under section 40-25 of the ITAA 1997. Subsection 40-25(2) of the ITAA 1997 reduces deductions for decline in value where the depreciating asset is not used wholly for a taxable purpose.
Each machine is a depreciating asset within the definition in section 40-30 of the ITAA 1997. If they had been used, or installed ready for use, for any purpose the decline in value would have been worked out under Subdivision 40-B of the ITAA 1997.
A balancing adjustment event has occurred for the machines because the taxpayer stopped holding them when they were sold (paragraph 40-295(1)(a) of the ITAA 1997). Therefore an amount is to be included in assessable income under subsection 40-285(1) of the ITAA 1997 subject to any reduction under section 40-290 of the ITAA 1997.
A depreciating asset does not start to decline in value until its start time occurs, which is generally when it is first used, or installed ready for use, by a taxpayer for any purpose (section 40-60 of the ITAA 1997). The adjustable value of a depreciating asset that has not started to decline in value is the cost of the asset (paragraph 40-85(1)(a) of the ITAA 1997).
There has been no reduction in the deduction for the decline in value of the machines under section 40-25 of the ITAA 1997 because they have not started to decline in value. Therefore section 40-290 of the ITAA 1997 does not reduce the amount included in assessable income under subsection 40-285(1) of the ITAA 1997.
In the example the machine's adjustable value is its cost, being $5,000. The termination value of the machine is $6,000, being the amount received for it (subsection 40-305(1) of the ITAA 1997). The assessable amount under subsection 40-285(1) of the ITAA 1997 is $1,000.
Date of decision: 30 January 2003Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
Section 40-25
Subsection 40-25(2)
Section 40-30
Section 40-60
Paragraph 40-85(1)(a)
Subsection 40-285
Subsection 40-285(1)
Section 40-290
Subsection 40-290(1)
Paragraph 40-295(1)(a)
Subsection 40-305(1)
ATO ID 2003-185
Other References:
Guide to Depreciating Assets NAT 1996-6.2002
Keywords
Assessable balancing adjustment amount
Balancing adjustment event
Capital Allowances CoE
Taxable purpose
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 30 January 2003 | Original statement |
| 18 July 2014 | Updated statement |