Private ruling: Commissioner's discretion under subsection 40-365(3) of the Income Tax Assessment Act 1997
Date of advice: 10 July 2015
Published: July 2015
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the Commissioner allow a further period to allow you to make a choice for a replacement asset under subsection 40-365(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 365

Reasons for decision: Summary: An amount need not be included in assessable income as a result of the balancing adjustment event if the event was an involuntary disposal (e.g. the asset was lost, destroyed or compulsorily acquired) and the taxpayer chooses to apply the assessable balancing adjustment amount to reduce the cost or the adjustable value of a replacement asset in respect of which depreciation is available. Subdivision 40-D of the ITAA 1997 discusses balancing adjustments. Section 40-365 of the ITAA 1997 discusses involuntary disposals. Subsection 40-365(1) of the ITAA 1997 states you may exclude some or all of an amount that has been included in your assessable income for a depreciating asset (the original asset) as a result of a balancing adjustment event to the extent that you choose to treat it as an amount to be applied under subsection (5) for one or more replacement assets. Subsection 40-365(2) of the ITAA 1997 in part states you can only make this choice if you stop holding the asset because the original asset is lost or destroyed. Subsection 40-365(3) of the ITAA 1997 states you can only make this choice for a replacement asset if you incur the expenditure on the replacement asset, or you start to hold it: (a) No earlier than one year, or within a further period the Commissioner allows, before the balancing adjustment event occurred; and (b) No later than one year, or within a further period the Commissioner allows, after the end of the income year in which the balancing adjustment event occurred. In this case an asset which was an integral asset of the business was destroyed; therefore you stopped holding the asset. The balancing adjustment event occurred in the relevant financial year due to the loss of the asset. Due to unfortunate circumstances and the nature of the industry it has taken some time to recover the asset, for the insurance company to assess the claim and to locate a suitable asset to replace the destroyed asset. Due to the unusual circumstances the Commissioner will allow a further 12 months for you to make the choice. This extension covers the 2015-16 financial year.

Relevant facts: The entity operates a business. | The business had a small number of assets used in the business. One in particular was the main source of income production. | The asset which was the main source of income production was destroyed in the relevant financial year. | Delays occurred while recovering the asset and it also took time for insurance assessors to assess the damage for insurance purposes. | Consideration of the existing business model needed to be undertaken to establish the type of asset that needed to be procured to ensure the ongoing viability of the business. | Since the loss of the asset, the entity has researched the relevant market and have identified the specific asset type that could economically replace the asset. | The entity has been in contact with owners in various States of Australia and a number of overseas countries. | Asset inspections have been carried out in a number of Australian States and overseas countries. | Research has also been undertaken with the relevant Government authorities and relevant industry experts. | As yet a replacement has not been located however the entity is confident that with the research already undertaken a replacement asset can be located within the next 12 months.