ATO ID 2007/86: Depreciating assets previously held by an exempt entity: availability of pre-existing audited book value to partially completed assets which are work in progress
Date of decision: 22 February 2007
Year of income: Year ending 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
If, at the balance date relevant under section 58-85 of the Income Tax Assessment Act (ITAA 1997) for the determination of the pre-existing audited book value of the taxpayer's privatised asset, a partially completed asset constituted work in progress of an exempt entity, is the taxpayer entitled to a pre-existing audited book value when it acquires the completed depreciating asset?

Decision
No. At the balance date relevant under section 58-85 for determination of the pre-existing audited book value of the taxpayer's privatised asset the partially completed asset constituting work in progress of an exempt entity was not a depreciating asset and, therefore, was not the privatised asset acquired by the taxpayer.

Facts
The taxpayer acquired, from an exempt entity, a depreciating asset that was rail transport trackwork. The rail transport trackwork became a privatised asset under paragraph 58-5(5)(d) of the ITAA 1997 once acquired by the taxpayer. The taxpayer wanted to choose, under section 58-65 of the ITAA 1997, to use the undeducted pre-existing audited book value to work out the first element of cost of each privatised asset that was included in the audited accounts of the exempt entity at 30 June 1996. The trackwork was completed by the time of its acquisition in 2003. However, at 30 June 1996 the rail transport trackwork was still under construction. This asset was included in the audited accounts for 1995-96 income year of the exempt entity as work in progress.

Reasons for decision
Summary: All legislative references in this Interpretative Decision are to the ITAA 1997 Division 58 sets out special rules that apply in calculating deductions for the decline in value of a depreciating asset under Division 40. In an asset sale situation, a depreciating asset the purchaser acquires from the Commonwealth, a State, a Territory or an exempt entity is a privatised asset. An asset sale situation occurs where a taxable entity acquired a business from the Commonwealth, a State, a Territory or an exempt entity and also acquires a depreciating asset in connection with the acquisition of the business. Under section 58-85 the pre-existing audited book value (PABV) is taken to be the specified value shown for the privatised asset in the balance sheet, at the balance date, of an exempt entity, where the conditions in paragraphs 58-85(1)(a) to 58-85(1)(c) are satisfied. In order to determine a value for a privatised asset, the requirements in section 58-85 mean that the asset (in the audited accounts for 1995-96 income year of the tax exempt entity) has to be the same asset as the privatised asset. At the relevant balance date, in this case, the asset was uncompleted rail transport track work. It was included in the audited accounts as work in progress and, to the extent that it is an asset, is a different asset from the completed trackwork the taxpayer acquired from the tax exempt entity. At the relevant balance date, the uncompleted rail transport trackwork was not in a condition that enabled it to function or to be used as a depreciating asset. It therefore would not be considered to be a depreciating asset. At the time the taxpayer acquired the completed trackwork, it was a different asset. The subsequent completion of its construction enabled it to be recognised as a depreciating asset and, therefore, a privatised asset. Accordingly, a PABV for the work in progress asset which was under construction at 30 June 1996 is not available to the taxpayer under section 58-85. Where there is no PABV for a privatised asset, claims for decline in value will be based on the notional written down value of the asset as worked out under section 58-75

Legislative references: Income Tax Assessment Act 1997 Division 40 Division 58 paragraph 58-5(5)(d) section 58-65 section 58-75 section 58-85 paragraph 58-85(1)(a) paragraph 58-85(1)(b) paragraph 58-85(1)(c)
Related ATO interpretative decisions: ATO ID 2006/259
Subject references: Decline in value Depreciating assets Asset sale situation Privatised assets