Private ruling: Balancing adjustment for depreciating assets
Published: November 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: On or after 1 January 20XX

Ruling: Q1: Is a deduction available under section 40-25 of the ITAA 1997 for the decline in value of your four vending machines? | A1: Yes. | Q2: Has a balancing adjustment event occurred under subsection 40-295(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when you decided to stop using the machines and expect never to use them again? | A2: Yes. | Q3: If a balancing adjustment event has occurred, are you entitled to a deduction under subsection 40-285(2) of the Income Tax Assessment Act 1997 ? | A3: Yes

Relevant facts and circumstances: You purchased a number of machines to be used for income producing purposes in the relevant financial year. The machines are made specifically for a product, and cannot be used for any other product. The machines were installed at various locations in your town, and an agreement was entered into between you and entities entitled them to a percentage of the sales. You did not receive any income from advertising on the machines, and on inspection of the machines you realised that people were not buying the product. The locations requested that the machines be removed, which was done in the subsequent financial year. The machines are currently being stored at a location organised by the machine sales person, who organised the removal of the machines. The machines are no longer installed ready for use. You asked the sales person to sell the machines on your behalf, however they have not sold and you do not expect them to sell. You expect never to have the machines installed ready for use again. You have thrown away the remainder of the stock not used on the machines. You did not make any money from the machines however they were installed for the purpose of deriving income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-25 | Income Tax Assessment Act 1997 Section 40-85 | Income Tax Assessment Act 1997 Subsection 40-285(1) | Income Tax Assessment Act 1997 Subsection 40-285(2) | Income Tax Assessment Act 1997 Subsection 40-295(1) | Income Tax Assessment Act 1997 Paragraph 40-295(1)(b) | Income Tax Assessment Act 1997 Section 40-300 | Income Tax Assessment Act 1997 Subsection 40-300(2)

Reasons for decision: Summary: Unless otherwise stated, all legislative references in the following reason for decision pertain to the Income Tax Assessment Act 1997. | Detailed Reasoning - Decline in value: Section 40-25 allows you to deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. A holder of a depreciating asset may deduct an amount for its decline in value. The decline in value of a depreciating asset starts when you first use it, or install it ready for use. A deduction is only allowable to the extent it is used for a taxable purpose or for the purpose of producing assessable income. The deduction amount is based on a depreciating assets cost, effective life and the number of days the asset is used in the income year for a taxable purpose. Therefore you are entitled to a deduction for the decline in value of the machines from the date they were install it ready for use, until they were removed from the locations. | Detailed Reasoning - Balancing adjustment: Taxpayers can deduct a balancing adjustment for a depreciating asset under subsection 40-285(2), from the calculation of their taxable income when a balancing adjustment event has occurred in the year of income. Subsection 40-295(1) states that a balancing adjustment event occurs for a depreciating asset if: a) you stop holding the asset; or b) you stop using it, or having it installed ready for use, for any purpose and you expect never to use it, or have it installed ready for use, again; or c) you have not used it and: (i) if you have had it installed ready for use - you stop having it so installed; and (ii) you decide never to use it. The machines are not installed ready for use, and you expect never to have them installed ready for use again. Therefore it is considered that a balancing adjustment event has occurred under paragraph 40-295(1)(b) for the machines. | Detailed Reasoning - Balancing adjustment calculation: When a balancing adjustment event occurs for a depreciating asset, whose decline in value has been worked out under subdivision 40-B, its termination value will be compared to its adjustable value to determine the balancing adjustment amount. Where the termination value exceeds the adjustable value, that amount will be included in assessable income (subsection 40-285(1)). However where the adjustable value exceeds the termination value, that amount will be allowed as a deduction (subsection 40-285(2)). | Detailed Reasoning - Termination value: The applicable termination value will be determined by referring to section 40-300. In your case Item 1 of the table in subsection 40-300(2) applies. The termination value in this case is the market value of the asset when you stopped using it or having it installed ready for use. As you have not been able to sell the machines, and provided they are never sold, the market value will be nil. If the machines are sold, the market value will be the amount the machines are sold for. | Detailed Reasoning - Adjustable value: Section 40-85 states that the adjustable value of a depreciating asset at a particular time is: a) if you have not yet used it or had it installed ready for use for any purpose - its cost; or b) for a time in the income year in which you first use it, or have it installed ready for use, for any purpose - its cost less its decline in value up to that time; or c) for a time in a later income year - the sum of its opening adjustable value for that year and any amount included in the second element of its cost for that year up to that time, less its decline in value for that year up to that time. In your case, the adjustable value of the machines at the time the balancing adjustment event occurred is its cost less the decline in value of the machines up to that time. | Detailed Reasoning - Subsequent balancing adjustment event: As you continue to hold the depreciating asset following a balancing adjustment event under paragraph 40-295(1)(b), it is possible for a second balancing adjustment event to occur. For example, if at some later stage you are able to sell one or all of the machines, another balancing adjustment event is triggered under paragraph 40-295(1)(a) as you would cease to hold the asset. In the event a subsequent balancing adjustment event occurs, the appropriate termination value will again be compared to the asset's adjustable value, and the difference either included in assessable income or allowed as a deduction. After the first balancing adjustment event occurred, the opening adjustable value of the depreciating asset you hold is then zero under subsection 40-285(3). Therefore, the proceeds (the termination value) of any subsequent sale will need to be included as assessable income in the financial year in which the sale occurred.