Private ruling: First element of cost of depreciating assets
Published: May 2013
Ruling period: The 2009 to 2013 income year
Date scheme commenced: During the 2009 income tax year.

Ruling: Q1: Pursuant to sections 40-180 and 40-185 of the Income Tax Assessment Act 1997 (ITAA 1997), is the market value of the Contingent Right at the time it was provided included in the first element of cost of the depreciating assets that Purchaser acquired from Seller? | A1: Yes | Q2: Did the creation of the Contingent Right in Seller cause CGT event D1 in section 104-35 of the ITAA 1997 to happen? | A2: No.

Relevant facts and circumstances: The taxpayer (Purchaser) is an Australian resident. Purchaser contracted for and completed the purchase of certain depreciating assets from another resident taxpayer (Seller). Purchaser holds the depreciating assets for the purpose of Division 40 of the ITAA 1997. Under the asset acquisition arrangements, Purchaser paid a cash sum to Seller and simultaneously provided Seller with a contractual, binding and vested Contingent Right to a further cash payment if and when certain future events occurred.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 section 40-175 | Income Tax Assessment Act 1997 section 40-180 | Income Tax Assessment Act 1997 subsection 40-180(1) | Income Tax Assessment Act 1997 subsection 40-180(2) | Income Tax Assessment Act 1997 subsection 40-180(3) | Income Tax Assessment Act 1997 section 40-185 | Income Tax Assessment Act 1997 subsection 40-185(1) | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 subsection 104-35(3) | Income Tax Assessment Act 1997 paragraph 104-35(5)(a) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Pursuant to sections 40-180 and 40-185 of the ITAA 1997 the market value of the Contingent Right at the time it was provided is included in the first element of cost of the depreciating assets that Purchaser acquired from Seller as the Contingent Right is a non-cash benefit that Purchaser provided in relation to starting to hold the depreciating assets and is an amount directly connected with holding the depreciating assets. On the facts of the arrangement, the relationship that exists between Purchaser's acquisition of the depreciating assets and Purchaser providing the Contingent Right is a vital one, and there is a relevant, clear, and direct link between the non-cash benefit provided by Purchaser and Purchaser starting to hold the depreciating assets. The creation of the Contingent Right in Seller did not cause CGT event D1 in section 104-35 of the ITAA 1997 to happen because Purchaser created the right by borrowing money or obtaining credit from another entity for the purpose of paragraph 104-35(5) of the ITAA 1997.