Private ruling: Capital allowances - depreciation - balancing adjustment issues
Date of advice: 9 March 2022
Published: May 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion to provide further time to incur expenditure on replacement assets or start to hold replacement assets under paragraph 40-356(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. Having considered your circumstances and the relevant factors, the Commissioner is able to apply his discretion under section 40-365 of the ITAA 1997 and allow an extension of time. Further information on what happens when you stop holding a depreciating asset can be found on our website ato.gov.au and entering Quick Code QC 48118 into the search bar at the top right of the page.

Relevant facts and circumstances: In the 20XX-XX income year, the taxpayer's building burnt down and an insurance claim of $X was received in regards to the involuntary disposal. The original amount of insurance received was split into the Y amounts in the building (worth $X) and the cost of replacing the building ($X). The Y proceeds were included in the 20XX-XX income tax return. The proceeds from this insurance claim were deferred under section 40-365, to be applied against construction costs towards the replacement shed. In the 20XX-XX income year $X was paid towards the replacement building with the understanding that the new building would be completed within the 12 month time frame. Unfortunately, the builder was injured and could not continue the job. It was difficult to engage a new contractor. Due to these unforeseen circumstances, there was understandably a delay in recommencement of work with a new contractor. As the client is based rurally, the availability of builders, as well as supply chain issues in construction due to COVID, meant that the replacement building was not completed within the 12 month period. At the end of the 20XX-XX income year, an additional $X had been paid towards the new building construction, and you can confirm that the building construction was completed by XX XX 20XX. The remaining payments being made between XX XX 20XX and XX XX 20XX totalled $X, giving a total cost of construction of the building of an estimated $X. The gain of $X will be included in the taxpayer's income tax return in the 20XX-XX income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-365