Private ruling: depreciation
Published: October 2013
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Has a balancing adjustment event occurred in relation to the equipment? | A1: Yes. | Q2: Is the termination value of the depreciating asset at the time when the balancing adjustment event occurred, the market value? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-295 | Income Tax Assessment Act 1997 Section 40-300

Reasons for decision: Summary: Where a balancing adjustment event occurs in relation to a depreciating asset you may have to include an amount in your assessable income or you may be able to claim a further deduction, depending on the termination value and the balance of your general pool. The meaning of a balancing adjustment event is set out in section 40-295 of the Income Tax Assessment Act 1997 (ITAA 1997). A balancing adjustment event occurs for a depreciating asset if, you stop holding the asset, or 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. The evidence you have provided indicates that your ex-partner sold the equipment. At that time you sought advice from the police and Legal Aid as to what action you could take against your ex-partner. The advice was conflicting and you could not afford to take separate legal action, so no further action was taken. One argument put forward was that your ex-partner may have had some entitlement to the property due to the length of your relationship. Based on the evidence available and that no legal action has been taken against your ex-partner we consider that there has been a disposal of the depreciating assets and you no longer hold the assets. Therefore there has been a balancing adjustment event. To be able to calculate the effect of a balancing adjustment event we have to determine the 'termination value' of the depreciating assets at the time of the balancing adjustment event. The general rule is that the termination value of the asset is the amount the taxpayer is taken to have received for the balancing adjustment event (section 40-305 of the ITAA 1997). There are specified termination values that may apply in preference to the general rules and these are set out in the table in section 40-300 of the ITAA 1997. We consider that item 6 of the table would apply in your situation. If you stopped holding an asset under a non-arm's length dealing for less than the market value, the termination value is its market value just before the taxpayer stopped holding it. We consider that your ex-partner has disposed of the depreciating assets to a party where the dealings were not at arms length. It does not matter whether the buying party were related or not, we have to look at the actual dealing. In normal arms length dealings you would expect the sale price to be at market value. This is normally established through what a not more than willing seller would sell for and a willing purchaser would pay. The items appear to have been sold at well below the market value, therefore we consider the dealing not to be at arms length. It is considered in your case that the termination value for the equipment in this balancing adjustment event is the market value, under item 6 of subsection 40-300(2) of the ITAA 1997. If an overall loss was created from this event, this loss would not be affected by the non-commercial losses rules as you would not be considered to be carrying on a business in the year the balancing adjustment event occurred.

Relevant facts: You stopped operating a business due to family issues and had the intention of recommencing business, once things had settled down. | You had been operating the business for a period of time and had a profit in each year. You separated from your partner and left the equipment at the jointly owned residence, while you moved into other accommodation. | Your ex-partner sold your equipment on the internet for less than market value and the closing balance of the small business pool as at the end of that financial year. You received no money. | You reported the incident to the police. Your ex-partner was not an owner of the assets and had not been involved in the operation of the business. The police would not press charges as they said it was a domestic situation and your ex-partner may have had some entitlement to the property. They advised you to seek legal advice. You sought legal advice from Legal Aid and they advised you should go back to the police. You sought further advice but could not get any action taken and could not afford to take private legal action. | You were never able to recover any of the plant and equipment. | There were no assets or monies to be distributed by way of settlement between the parties, when the separation was finalised.