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Will the Commissioner allow a taxpayer a further period of time to acquire a replacement asset under paragraph 40-365(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), where the delay is due to unsettled indemnification of insurance claims?

Yes. The Commissioner will allow a taxpayer further time to acquire a replacement asset under paragraph 40-365(3)(b) of the ITAA 1997 where the delay is due to unsettled indemnification of insurance claims.

In September 2001 a fire destroyed the taxpayer's business including the depreciating assets. The taxpayer has submitted insurance claims for the loss of the depreciating assets.

The insurance company has paid certain monies from time to time pending final settlement of the taxpayer's claims.

The taxpayer claims that until the insurance claims are satisfied, they are unable to make informed and responsible decisions about the expenditure to be made on the replacement assets.

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 is 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.

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 the Commissioner allows, after the end of the income year in which the balancing adjustment occurred (see paragraph 40-365(3)(b) of the ITAA 1997).

In making this choice the taxpayer must have used the replacement asset, or have it installed ready for use, wholly for a taxable purpose by the end of the income year in which they incurred the expenditure on the asset, or started to hold it, and be able to deduct an amount for it (see subsection 40-365(4) of the ITAA 1997).

As a fire has destroyed the business including all of the depreciating assets the taxpayer can choose to apply section 40-365 of the ITAA 1997 for the involuntary disposal of the depreciating assets.

Given that it is unlikely that the insurance claims will be settled within the required time frame to acquire replacement assets and the taxpayer has taken all reasonable steps to have the insurance claims settled, the Commissioner will exercise his discretion to grant a further period of time under paragraph 40-365(3)(b) of the ITAA 1997.

Support for this decision can be drawn from Taxation Determination TD 2000/40 which explains the operation of paragraph 124-75(3)(b) of the ITAA 1997 (the capital gains tax treatment of acquiring another (replacement) asset). Both the wording and the operation of paragraph 40-365(3)(b) of the ITAA 1997 are similar to paragraph 124-75(3)(b) of the ITAA 1997. TD 2000/40 lists a number of examples where the Commissioner will allow further time where special circumstances exist. The circumstances outlined in those examples are analogous to the circumstances of this taxpayer.