Private ruling: Balancing adjustment - Involuntary disposal
Published: June 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

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 to 30 June 2013? | A1: Yes

Relevant facts and circumstances: Your property was extensively damaged by a natural disaster during the 2009-10 income year. You did not receive any compensation until the 2010-11 income year. You began to incur expenditure on replacing the destroyed assets; however, the area experienced further natural disasters in 2010, 2011 and in 2012. These further disasters impacted your ability to acquire replacement assets as you also had to deal with further damage to your property and contractors in the area were in extremely great demand and therefore difficult to engage. The majority of the destroyed assets will be replaced by 30 June 2012; however, due to the further natural disasters, you will be unable to replace all of the assets by this time. You request an extension of time to acquire the replacement assets to 30 June 2013.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-365 | Income Tax Assessment Act 1997 Paragraph 40-365(3)(b)

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 was destroyed. The taxpayer can choose to use some or all of the amount that would otherwise be a balancing adjustment as a reduction in the cost and/or opening adjustable value of one or more replacement assets. The cost of the replacement asset is reduced by the otherwise assessable amount. In accordance with paragraph 40-365(3)(b) of the ITAA 1997 this exclusion can only be made where they incur the expenditure on the replacement assets no later than one year, or within a further period which the Commissioner allows, after the end of the income year in which the balancing adjustment occurred. The Explanatory Memorandum for the New Business Tax System (Capital Allowances) Bill 2001 discusses some examples of when the Commissioner may allow a further period under paragraph 40-365(3)(b) of the ITAA 1997 at paragraph 3.82: · in the event of a destruction of large infrastructure assets it will be likely to take than 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. A further example of where the Commissioner may agree to extend the time limit is provided in the Guide to Depreciating Assets 2010-11 (NAT 1996-6.2011) where it states that if it is unlikely that the insurance claims for the original asset will be settled within the required time even though you have taken all reasonable steps to have the insurance claim settled an extension of time may be granted. As a natural disaster has extensively damaged your property, including destroying depreciable plant and equipment, you can choose to apply section 40-365 of the ITAA 1997 for the involuntary disposal of the depreciating assets. In your case, there was an extended period of time before you received any compensation for the damage caused to your property. In addition, further natural disasters have delayed your ability to repair and replace the destroyed assets. We consider that you have provided an acceptable explanation for the delay in acquiring replacement assets. Accordingly, the Commissioner will exercise his discretion to grant a further period of time to 30 June 2013 under paragraph 40-365(3)(b) of the ITAA 1997 for you to acquire replacement assets.

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