ATO ID 2003/221: Capital Allowances: first element of cost (increase in liability) - amalgamation of incorporated associations
Date of decision: 20 December 2002
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Does Item 2 of the table in paragraph 40-185(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) apply in working out the first element of cost of depreciating assets started to be held by a new incorporated association on the amalgamation of two existing incorporated associations under the Associations Incorporation Act 1981 (Qld) (AIA (Qld))?

Decision
Yes. Item 2 of the table in paragraph 40-185(1)(b) of the ITAA 1997 does apply in working out the cost of depreciating assets started to be held by a new incorporated association on the amalgamation of two existing incorporated associations under the AIA (Qld).

Facts
A and B are unrelated incorporated associations under the AIA (Qld). A and B amalgamated under Part 9, Division 2 of the AIA (Qld) to form C, a new and legally separate incorporated association. A certificate of incorporation issued to C as a result of the amalgamation. The members of both A and B agreed to amalgamate from a certain date and to adopt their existing respective association's common rules and constitution for C. The members of A and B also agreed to transfer or donate their respective association's assets to C.

Reasons for decision
Summary: Section 79 of the AIA (Qld) defines an 'old association' to be an incorporated association that with one or other incorporated associations apply to form a new association. A 'new association' is defined in section 79 to be an incorporated association that is incorporated as a result of an application to amalgamate by at least two old associations. The legislation governing the amalgamation of associations does not provide for the continuation of the amalgamating entities (that is, A and B) within the form of the new entity (that is, C). The amalgamation is effected by the incorporation of a new association. The amalgamation of A and B to form C causes a balancing adjustment event to occur under paragraph 40-295(1)(a) of the ITAA 1997 for the depreciating assets held by A and B. The amalgamation also has the effect that C starts to hold the assets as the new owner of them (Item 10 of the table in section 40-40 of the ITAA 1997). The first element of cost of a depreciating asset is worked out as at the time when the asset starts to be held. In certain circumstances, the cost is the amount specified in section 40-180 of the ITAA 1997. Otherwise, the cost is worked out under section 40-185 of the ITAA 1997 (subsection 40-180(1) of the ITAA 1997). As no item in the table in subsection 40-180(2) of the ITAA 1997 applies, the cost is worked out under section 40-185 of the ITAA 1997. The cost under section 40-185 of the ITAA 1997 is taken to be the greater of the sum of the applicable amounts set out in paragraphs 40-185(1)(a) or (b) of the ITAA 1997. Item 2 of the table in paragraph 40-185(1)(b) of the ITAA 1997 includes in cost the amount of the liability (or increase in liability) incurred (or increased) to hold a depreciating asset. Section 86 of the AIA (Qld) provides that upon the incorporation of a new association as a result of the amalgamation of old associations, the assets and liabilities of the old associations become the assets and liabilities of the new association. This means that in addition to starting to hold the assets of A and B, C assumes the liabilities of the old associations. In the present case, the liabilities referred to in Item 2 of paragraph 40-185(1)(b) of the ITAA 1997 encompass all of the liabilities assumed under the amalgamation. In this case, all of the liabilities assumed relate to all of the assets transferred, including depreciating assets. A reasonable attribution of the total amount of all of the liabilities assumed needs to be made to the depreciating assets. The amount so attributed is taken, under Item 2 of paragraph 40-185(1)(b) of the ITAA 1997 (see section 40-195 of the ITAA 1997), to have been paid to hold the depreciating assets. The relative market value of all the assets transferred is a reasonable basis on which to attribute the liabilities to the depreciating assets.

Legislative references: Income Tax Assessment Act 1997 section 40-40 section 40-180 subsection 40-180(1) subsection 40-180(2) section 40-185 paragraph 40-185(1)(a) paragraph 40-185(1)(b) section 40-195 section 40-295 paragraph 40-295(1)(a)
Related public rulings and determinations: Taxation Determination TD 98/24
Related ATO interpretative decisions: ATO ID 2003/218 | ATO ID 2003/219 | ATO ID 2003/220
Subject references: Balancing adjustment event Capital allowances CoE Depreciating assets First element of cost Uniform capital allowance system