Private ruling: Extension of time for replacement of depreciating assets due to involuntary disposal
Date of advice: 9 December 2021
Published: March 2022
Ruling period: Income year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the Commissioner exercise his discretion under paragraph 40-365(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1977) to allow you further time to incur expenditure on replacement assets to 30 June 20xx? | A1: Yes.

Relevant facts and circumstances: You ceased to hold depreciating assets used wholly in your business because they were destroyed in a fire. You had limited options for ordering the replacement assets and having them installed. Difficulties were increased by the extent of fire damage in the local surrounding area. The replacement of unique materials needs to be sourced from overseas causing further difficulty Scarcity of labour and resources in the industry makes it impossible for you to replace the assets before the end of the 20xx financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-285 | Income Tax Assessment Act 1997 subsection 40-285(1) | Income Tax Assessment Act 1997 section 40-295 | Income Tax Assessment Act 1997 subsection 40-295(1) | Income Tax Assessment Act 1997 section 40-300 | Income Tax Assessment Act 1997 subsection 40-300(1) | Income Tax Assessment Act 1997 subsection 40-300(2) | Income Tax Assessment Act 1997 section 40-365

Reasons for decision: Summary: Section 40-365 of the ITAA 1997 allows a taxpayer to choose whether or not to include a balancing adjustment amount in their assessable income where they cease to hold a depreciating asset because it is destroyed. The taxpayer can choose to use some or the entire amount that would otherwise be a balancing adjustment as a reduction in the cost and/or the opening adjustable value of one or more replacement assets. The cost of the replacement asset or assets is reduced by the otherwise assessable amount. One of the requirements for the taxpayer to be able to make this choice is that they incur the expenditure on a replacement asset, or start to hold it, no later than one year, or within a further period the Commissioner allows, after the end of the income year in which the balancing adjustment occurred (paragraph 40-365(3)(b) of the ITAA 1997). The Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 (the EM) states at paragraph 3.82: Examples of when the Commissioner may allow a further period under paragraph 40-365(3)(b) include: • in the event of a destruction of large infrastructure assets it will be likely to take... more than 12 months to rebuild those assets, and there are no suitable corresponding assets acquired within 12 months before or after the destruction; or • in the event of the replacement asset being acquired from overseas it will be likely to take more than 12 months to deliver such assets, and there are no suitable corresponding assets acquired within 12 months before or after the destruction. The factors that the Commissioner considers in making a favourable decision to allow further time are delays outside the control of the taxpayer or situations where construction time makes it difficult (or impossible) to replace the asset within the required time. On consideration of the facts and circumstances and consistent with the principles and guidance in the EM, the Commissioner will exercise his power under paragraph 40-365(3)(b) to grant you a further period of time until 30 June 20xx for you to incur expenditure on the replacement assets (or start to hold the assets).