ATO ID 2003/825: Capital Allowances: balancing adjustment event for a depreciating asset that is no longer used
Date of decision: 22 August 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Does a balancing adjustment event occur under paragraph 40-295(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), for a depreciating asset, which the taxpayer stopped using prior to 1 July 2001, and expected never to use again?

Decision
Yes. Division 40 of the ITAA 1997 applies to the asset and a balancing adjustment event occurred under paragraph 40-295(1)(b) of the ITAA 1997 for the depreciating asset.

Facts
The taxpayer commenced a business as a sub-distributor of a kind of dispensing machine. The taxpayer purchased several machines on business commencement. The taxpayer used the machines solely for a taxable purpose and deducted amounts for the machines under Division 42 of the ITAA 1997. The taxpayer found that the machines were faulty and unable to be used in the business. Prior to 1 July 2001, the taxpayer stopped operating the machines and sold the majority of them. The remaining machines had a market value of zero at the time the taxpayer stopped using them. During the 2001-02 income year, the taxpayer decided it would never use the remaining machines again.

Reasons for decision
Summary: From 1 July 2001, Division 40 of the ITAA 1997 provides a set of general rules that applies across a variety of depreciating assets including plant. In particular, paragraph 40-295(1)(b) of the ITAA 1997 provides that a balancing adjustment event occurs for a depreciating asset you held if you stop using it, or having it installed ready for use, for any purpose and you expect never to use it, or have it installed ready for use again. For a balancing adjustment event that occurs under paragraph 40-295(1)(b) of the ITAA 1997, there is no requirement that the depreciating asset be sold or otherwise disposed of. Where you have deducted or could have deducted amounts for plant under Division 42 of the ITAA 1997, Division 40 of the Income Tax (Transitional Provisions) Act 1997 ensures that Division 40 of the ITAA 1997 applies to the asset that you held on or before 1 July 2001. Therefore, a balancing adjustment event occurred under paragraph 40-295(1)(b) of the ITAA 1997 for the unsold machines at some time in the 2001-02 income year when the taxpayer decided it would never use them again. The termination value of the machines is equal to their market value at the time the taxpayer stopped using them, which was zero. A further balancing adjustment event could arise under paragraph 40-295(1)(a) of the ITAA 1997 when the taxpayer stops holding the machines.

Legislative references: Income Tax Assessment Act 1997 paragraph 40-295(1)(a) paragraph 40-295(1)(b) Division 40 Division 42
Related ATO interpretative decisions: ATO ID 2005/190
Subject references: Balancing adjustments Balancing adjustment event Depreciating assets Hold a depreciating asset Termination value Uniform capital allowances system