ATO ID 2003/185: Capital Allowances: deductible balancing adjustment if a depreciating asset is not used
Date of decision: 30 January 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Is a taxpayer entitled to a deduction under subsection 40-285(2) 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 less 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 less than its cost an amount can be deducted under subsection 40-285(2) of the ITAA 1997. Section 40-290 of the ITAA 1997 will not reduce the amount of that deduction.

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 less than its cost. For example, a machine that cost $5,000 was sold for $4,000.

Reasons for decision
Summary: An amount may be deducted under subsection 40-285(2) of the ITAA 1997 if: The amount to be deducted 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 deductible under subsection 40-285(2) 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 of the deduction under subsection 40-285(2) 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 $4,000, being the amount received for it (subsection 40-305(1) of the ITAA 1997). A deduction for the amount of $1,000 is therefore available under subsection 40-285(2) of the ITAA 1997.

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(2) Section 40-290 Subsection 40-290(1) Paragraph 40-295(1)(a) Subsection 40-305(1)
Related ATO interpretative decisions: ATO ID 2003-186
Other references: Guide to Depreciating Assets 2013 NAT 1996
Subject references: Balancing adjustment deduction Balancing adjustment event Taxable purpose