ATO ID 2003/461: Capital Allowances: balancing adjustment - pre-CGT depreciating asset disposed of after 30 June 2001
Date of decision: 11 June 2003
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Does subsection 40-285(5) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) apply to reduce an amount included in the taxpayer's assessable income under subsection 40-285(1) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer has acquired an item of plant before 20 September 1985?

Decision
Yes. The amount included in the taxpayer's assessable income under subsection 40-285(1) of the ITAA 1997 is reduced as the item of plant was acquired before 11.45 am, by the legal time in the Australian Capital Territory on 21 September 1999 and the capital gain or loss would have been disregarded under Part 3-1 of the ITAA 1997 as the item of plant is a pre-CGT asset at the time of the balancing adjustment event under subparagraph 40-285(5)(b)(iv) of the IT(TP)A 1997.

Facts
A taxpayer purchased an item of plant before 20 September 1985 for $15,000. The taxpayer used the item of plant wholly for a taxable purpose. The item of plant was sold after 30 June 2001 for $18,000. The adjustable value of the item of plant is nil.

Reasons for decision
Summary: Subsections 40-285(1) and 40-285(4) of the IT(TP)A 1997 provides that depreciating assets held on 1 July 2001 will be subject to the balancing adjustment provisions under Division 40 of the ITAA 1997. Subsection 40-285(1) of the ITAA 1997 applies to a balancing adjustment event that occurs after 30 June 2001 on a depreciating asset whose decline in value is or would have been worked out under Subdivision 40-B of the ITAA 1997. Paragraph 40-285(1)(b) of the ITAA 1997 provides that the amount to be included in assessable income is the difference between the asset's termination value and its adjustable value. Subparagraph 40-285(5)(b)(iv) of the IT(TP)A 1997 provides transitional measures if any capital gain or capital loss would be disregarded because the asset was a pre-CGT asset at the time of the balancing adjustment event. The assessable balancing adjustment amount calculated under subsection 40-285(1) of the ITAA 1997 is reduced by the following formula as contained in subsection 40-285(6) of the IT(TP)A 1997: [Termination value - Cost] x [1 - (Sum of reductions / Total decline)] As the depreciating asset was a pre-CGT asset at the time of the balancing adjustment event, the assessable balancing adjustment amount calculated under subsection 40-285(1) of the ITAA 1997 is reduced by an amount as calculated under the formula contained in subsection 40-285(6) of the IT(TP)A 1997. In general, a pre-CGT asset is an asset that was acquired before 20 September 1985 under Part 3-1 of the ITAA 1997. In this case, the balancing adjustment amount to be included in the taxpayer's assessable income as calculated under subsection 40-285(1) of the ITAA 1997 is $18,000, being the difference between $18,000 and $0. However, as the item of plant is a pre-CGT asset as it was acquired before 20 September 1985, subsection 40-285(5) of the IT(TP)A 1997 will have the effect of reducing the balancing adjustment amount by an amount as calculated under the formula contained in subsection 40-285(6) of the IT(TP)A 1997. The reduction amount as worked out using the formula is: $18,000 - $15,000 X (1 - ($0/$15,000)) = $3,000 X 1 = $3,000. Therefore, the amount to be included by the taxpayer in their assessable income in respect of the item of plant is $15,000 - that is, $18,000 minus $3,000.

Legislative references: Income Tax Assessment Act 1997 subsection 40-285(1) paragraph 40-285(1)(b) Subdivision 40-B Division 40 Part 3-1
Subject references: Adjustable value of a depreciating asset Balancing adjustment event Balancing adjustments Termination value