ATO Interpretative Decision
ATO ID 2006/289
Income tax
Capital allowances: choosing to recalculate effective lifeFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can the transition entity choose, from a later income year, to recalculate the effective life of the depreciating asset it holds at the transition time in accordance with subsection 40-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The transition entity can choose, from a later income year, to recalculate the effective life of the depreciating asset it holds at the transition time in accordance with subsection 40-110(1) of the ITAA 1997.
Facts
The taxpayer is a transition entity for the purposes of Division 58 of the ITAA 1997. All the shares in the taxpayer were sold under a sale process that was an entity sale situation within the meaning of that term in Division 58. The transition time for the purpose of Division 58 was the time of the sale of the shares. The transition entity owns and uses a tangible depreciating asset (within the meaning of that term in section 40-30 of the ITAA 1997) that it held just before the transition time and that is a privatised asset for the purposes of Division 58. At the transition time the transition entity holds and uses that same tangible depreciating asset.
The depreciating asset was not an asset to which any of subsections 40-95(4)-(6) inclusive applies. The transition entity did not apply section 40-102 (about the capped life of certain depreciating assets) in working out the first element of cost of the privatised asset for the purpose of Division 58.
Reasons for Decision
Broadly, Division 40 of the ITAA 1997 allows you to deduct the decline in value of a depreciating asset you hold over its effective life, to the extent you use the asset for a taxable purpose. The calculation of the decline in value of a depreciating asset for an income year is based on, among other things, its effective life. The transition entity must make a choice of determining the effective life of a tangible depreciating asset for the income year in which the asset's start time occurs (subsections 40-95(1) and (3) of the ITAA 1997).
Subsection 40-110(1) of the ITAA 1997 deals with the circumstances in which you may choose to recalculate the effective life of a depreciating asset from a later year. You may choose to recalculate the effective life from a later income year if the effective life you have been using is no longer accurate because of changed circumstances relating to the nature of the use of the asset. The recalculation must be done using section 40-105 of the ITAA 1997 (about self-assessing effective life) as required by subsection 40-110(4), and may be made whether the effective life you have been using was that determined by the Commissioner under section 40-100 of the ITAA 1997 or self-assessed under section 40-105 of the ITAA 1997.
Division 58 of the ITAA 1997 applies to an entity that is a transition entity in an entity sale situation. Subdivision 58-B sets out rules that affect the way in which a transition entity works out the decline in value of privatised assets under Division 40 after the transition time. However, Division 58 is silent as to the choice to recalculate the effective life of a depreciating asset from a later income year where the circumstances in subsection 40-110(1) of the ITAA 1997 are satisfied.
The intention that the choice in subsection 40-110(1) be available to a transition entity for a depreciating asset, is supported by paragraph 12.97 of the Explanatory Memorandum to the New Business Tax System (Capital Allowances - Transitional and Consequential) Act 2001, which inserted new Division 58 on introduction of Division 40, and which (to the extent it is relevant here) states:
Under the new Division 58 calculation rules, taxpayers will simply use the ordinary Division 40 rules with some minor modifications for all privatised depreciating assets. Taxpayers will no longer be required to apply rules contained in superseded depreciation regimes. Transition entities will now work out actual deductions for decline in value (after the transition time) of a privatised depreciating asset in the same way as a purchaser does in an asset sale situation, but subject to the requirement that a transition entity cannot change methods of depreciation for an asset.
Division 58 of the ITAA 1997 imposes no restriction on a transition entity's choice to recalculate the effective life of the depreciating asset from a later income year, where the circumstances in subsection 40-110(1) of the ITAA 1997 are satisfied. Accordingly, the transition entity can choose, after the transition time, and where the circumstances in that subsection are satisfied, to recalculate the effective life of the depreciating asset from a later income year.
Date of decision: 21 September 2006Year of income: Year ending 30 June 2007
Legislative References:
Income Tax Assessment Act 1997
section 40-30
subsection 40-95(1)
subsection 40-95(3)
section 40-100
section 40-102
section 40-105
subsection 40-110(1)
subsection 40-110(4)
ATO ID 2006/287
ATO ID 2006/288
Other References:
Explanatory Memorandum to the New Business Tax System (Capital Allowances - Transitional and Consequential) Act 2001
Keywords
Commissioner's determination of effective life
Decline in value
Depreciating assets
Effective life
Entity sale situation
Privatised assets
Recalculating effective life
Self-assessment of effective life
Transition entity
Transition time
ISSN: 1445-2782