Private ruling: Capital allowances - balancing adjustments
Published: September 2011
Ruling period: 1 July 2010 - 30 June 2011
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the Commissioner exercise his discretion under paragraph 40-365(3) of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the time limit for a replacement asset to be acquired? | A1: yes

Relevant facts and circumstances: You operate a business. One of your assets was destroyed. You consequently recovered an amount in an insurance pay out. Since then, you have attempted to source a suitable replacement that satisfies your needs and budget. It was a depreciating asset and was used in your business. Leading up to the cut off date, for acquiring a replacement asset, you made a cash offer on a suitable replacement asset but it had been sold one day prior to your offer. You have engaged a broker to source a suitable asset and were informed that there will be one available for sale in November 2011.

Relevant legislative provisions: Subsection 40-365(3) of the Income Tax Assessment Act 1977

Reasons for decision: Summary: Section 40-365 of the ITAA 1997 allows a taxpayer to exclude the balancing adjustment payable as a result of receiving the insurance payout after the loss of a depreciating asset, provided that the taxpayer acquires a replacement asset within a specified time period. The specified time period is that the taxpayer incurs the expenditure on the replacement assets or starts to hold the replacement asset, no earlier than one year before the involuntary disposal and no later than one year after the end of the income year in which the disposal occurred. Subsection 40-365(3) of the ITAA 1997 allows the Commissioner to exercise his discretion to extend the time period beyond the end of the financial year following the loss of the item. Examples that the Commissioner would extend the time period in the Explanatory Memorandum include the destruction of a large infrastructure asset or getting a replacement asset from overseas. To assist the Commissioner to further consider the exercise of his discretion, we refer to case law that deals with extension of time issues in similar provisions. The operation of paragraph 40-365(3)(b) of the ITAA 1997 is similar to paragraph 124-75(3)(b) of the ITAA 1997 which deals with the capital gains tax treatment of acquiring a replacement asset. Hunter Valley Developments Pty Ltd and Ors v Cohen (1984) 58 ALR 305, Wilcox J summarised principles to guide the exercise of the court's decision. These principles are of a general nature applicable where there is a discretionary power to extend a procedural time limit. With respect to the exercise of discretions generally, the following factors are relevant: · there should be evidence of an acceptable explanation for the period of time from the time the original asset was disposed of to the time the taxpayer incurred expenditure in acquiring the replacement asset; · account must be had of any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension; · account must be had of any unsettling of people, other than the Commissioner, or of established practices; · there must be a consideration of fairness between the taxpayer and other people in like positions and the wider public interest; · whether there is any mischief involved; and · a consideration of the consequences to the taxpayer. You have shown evidence that attempts have been made to source a replacement asset. It appears to be difficult to find a suitable one to suit your needs and within your budget by the required due date. Taking into account the circumstances of the limited number of suitable assets that become available for purchase, it would be fair and equitable to accept the extension of time. Hence, the requested extension for an additional six months to get a replacement asset has been allowed by the Commissioner under subsection 40-365(3) of the ITAA 1997.

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