Edited version of private advice

Authorisation Number: 1052206528369

Date of advice: 11 April 2024

Ruling

Subject: Depreciating assets

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

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 'nil'?

Answer

Yes.

This ruling applies for the following period:

Year ending DD June 20YY

The scheme commenced on:

DD September 20YY

Relevant facts and circumstances

The Trust acquired the Property in XX. The Property is a manufacturing and distribution facility which is leased to an unrelated tenant.

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

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

The Contract for Sale allocated a 'nil' value to the plant and equipment, 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. 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 subsection 2-15(3)

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 40-295

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

Income Tax Assessment Act 1997 section 40-300

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

Income Tax Assessment Act 1997 paragraph 40-305(1)(b)

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 subsection 995-1(1)

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 plant and equipment, 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 termination value of the Division 40 depreciating assets for each balancing adjustment event in respect of the sale of the Property is equal to 'nil'.

Detailed reasoning

Section 40-300 of the ITAA 1997 provides the meaning of termination value of a depreciating asset.

Generally, the termination value of the asset is the amount the taxpayer received or is entitled to receive for the balancing adjustment event per table item 1 of paragraph 40-305(1)(b). The other items in this table will not apply as:

•         no liability to pay an amount or provide a non-cash benefit has been terminated (items 2 and 5)

•         no right to receive an amount or a non-cash benefit has been granted (items 3 and 6), and

•         no non-cash benefit has been received (item 4).

The Contract for Sale of the Property allocated a 'nil' value to the Inclusions, being the Division 40 depreciating assets. The term 'amount' is defined to include a nil amount in accordance with subsection 2-15(3) and subsection 995-1(1) of the ITAA 1997.

There are specified termination values that may apply in preference to the general rule above, as set out in the table in subsection 40-300(2) of the ITAA 1997. The table covers a broad range of circumstances where a taxpayer will have a balancing adjustment event.

In particular, item 6 applies where a taxpayer stops holding a depreciating asset under a non-arm's length dealing and the consideration, or termination value, the taxpayer received is less than its market value. In such circumstances, the termination value of the depreciating asset is deemed to be its market value just before the taxpayer stopped holding it.

Subsection 995-1(1) of the ITAA 1997 states that in determining whether parties deal at arm's length, consideration should be given to any connection between them and any other relevant circumstance.

InThe Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation [1990] FCA 676 the term 'dealing with each other at arm's length' was considered. Hill J stated:

What is required in determining whether the parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.

There are circumstances where unrelated parties may act in a manner that is not considered to be arm's length. It was noted by Lee J in Granby Pty Ltd v Federal Commissioner of Taxation [1995] FCA 259 that:

If the parties to a transaction are at arm's length it will follow, usually, that the parties will have dealt with each other at arm's length. That is, the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargain may be.

That is not to say, however, that parties at arm's length will be dealing with each other at arm's length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps to promote the interests of the other.

Whether parties have dealt at arm's length is a question of fact that must be determined for each case. Relevant factors to consider include the following:

•         the circumstances of the transaction and the context in which it occurred with a view to determining whether or not the parties have conducted the transaction in a way which one would expect of parties dealing at arm's length

•         existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which might enable either party to influence or control the other, or induce either party to serve a common interest and so modify the terms on which strangers would deal

•         related parties may, in some circumstances, conduct a dealing so as to displace any inference based on relationship, and

•         unrelated parties may, on occasions, deal with each other in such a way that the resultant transaction may not properly be considered to be at arm's length.

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

3. If the property is disposed of under a contract and parties dealing with each other at arm's length allocate the overall capital proceeds to the separate assets in the contract, we will accept the allocation ...

Based on the relevant facts and circumstances, the Commissioner's view is that the Trust and the Purchaser were dealing at arm's length in relation to the sale of the Property and accordingly, the Commissioner accepts the allocation of 'nil' value to the Inclusions as set out in the Contract for Sale of the Property.

[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?