ATO ID 2005/190: Capital Allowances: balancing adjustment event - depreciating asset that failed to work - attempts to make the asset work were abandoned
Date of decision: 11 April 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Did a balancing adjustment event occur under paragraph 40-295(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) for a depreciating asset, which never worked and attempts to repair the asset were abandoned?

Decision
Yes. As the taxpayer had not used a depreciating asset, never had it installed ready for use and had decided never to use it, a balancing adjustment event occurred under paragraph 40-295(1)(c) of the ITAA 1997.

Facts
The taxpayer purchased a depreciating asset to be used in their business. The depreciating asset was to be used entirely for a taxable purpose. The depreciating asset failed to work from the time of purchase. Attempts to repair the depreciating asset were unsuccessful and the supplier refused to provide a replacement. The matter was then taken to Court and the taxpayer was successful, but the supplier went into liquidation before the taxpayer could enforce the Court's findings. The taxpayer decided not to continue to keep attempting to make the asset work, but continued to hold the asset.

Reasons for decision
Summary: Paragraph 40-295(1)(c) of the ITAA 1997 provides that a balancing adjustment event occurs for a depreciating asset if the taxpayer has not used it and: A depreciating asset which does not work during the period that it is held by a taxpayer and proves to be unable to work cannot be said to have been used or installed ready for use during that period. Under these circumstances, the taxpayer's abandonment of attempts to repair the depreciating asset is evidence that a decision was made by the taxpayer to never use the asset. At the time of abandonment of attempts to make the asset work there occurred a balancing adjustment event under paragraph 40-295(1)(c) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 paragraph 40-295(1)(c)
Subject references: Balancing adjustment event Depreciating asset Uniform capital allowances