ATO ID 2002/1016: Capital Allowances - Termination value
Date of decision: 30 August 2002
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
What is the termination value of depreciating assets under Subdivision 40-D of the Income Tax Assessment Act 1997 (ITAA 1997) for assets transferred from Club A to Club B upon the amalgamation of the two clubs, where a liability to repay an amount to Club B is terminated?

Decision
The termination value of a depreciating asset under Subdivision 40-D of the ITAA 1997 is the amount taken to be received under item 2 in the table in subsection 40-305(1) of the ITAA 1997. The item specifies that where all or part of a liability to pay an amount is terminated, the termination value is the amount of the liability or part when it is terminated.

Facts
Club A and Club B are companies limited by guarantee and both are registered under the Registered Clubs Act 1976 (NSW). Club A is amalgamating with Club B within the terms of paragraph 17AB(2)(b) of the Registered Clubs Act 1976 (NSW) which states that a reference to the amalgamation of 2 or more registered clubs is a reference to an amalgamation effected by the continuation of one of those clubs and the dissolution of the other club or clubs. As a result of the amalgamation, Club A is to be dissolved and Club B is to take over its assets. Club B had previously loaned an amount to Club A. The loan was secured by mortgage and made on condition that Club A would repay the loan within a period of 12 months or amalgamate with Club B. The loan was not repayable if the clubs amalgamated. The members of both clubs voted at a general meeting to amalgamate. Club A was placed in voluntary liquidation. The liquidator transferred the assets of Club A to Club B.

Reasons for decision
Summary: Termination value is worked out as at the time when the balancing adjustment event occurs. It is the amount specified in either subsection 40-300(1) or section 40-305 of the ITAA 1997. Item 2 in the table in subsection 40-305(1) of the ITAA 1997 applies to the circumstances of the transfer of depreciating assets by Club A. The item specifies that the amount taken to have been received where all or part of a liability to pay an amount is terminated is the amount of the liability or part when it is terminated. The transfer of assets to Club B is a necessary step in the amalgamation that satisfies the condition for non-repayment of the loan. The termination of the liability to repay the loan relates to more than the transfer of the depreciating assets. In the terms of Item 2 in the table in subsection 40-305(1) of the ITAA 1997, the termination value is the amount of the liability to which the transfer of the depreciating assets relates. That is, the amount of the loan, that no longer has to be repaid, that relates to the asset being transferred. Taxation Determination TD 98/24 states that the market values of the various components the payment was made for will be an acceptable basis for apportionment where there is no specific allocation in the agreement.

Legislative references: Income Tax Assessment Act 1997 Subsection 40-300(1) Section 40-305
Related public rulings and determinations: Taxation Determination TD 98/24
Related ATO interpretative decisions: ATO ID 2002/1017
Subject references: Balancing adjustment event Termination value Depreciating assets