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When does a balancing adjustment event occur under section 40-295 of the Income Tax Assessment Act 1997 (ITAA 1997) if the depreciating assets held by the leasing partnership are disposed of as a result of the call or the put option over the assets being exercised?

A balancing adjustment event occurs for the depreciating assets at the time the leasing partnership (the holder) stops holding the asset.

A partnership purchased various depreciating assets under a manufacture and supply agreement. It immediately leased the assets on commercial terms to an unrelated entity that had been awarded a franchise by another unrelated entity to operate a business in which the assets are used. As part of an arrangement with the partnership, the franchisor was granted a call option over the leased assets so that, on exercising the option in certain circumstances to purchase the assets, the franchisor can make the assets available to a subsequent franchisee. In another arrangement between the leasing partnership and an unrelated risk indemnifier, the risk indemnifier was granted a put option over the leased assets to enable the partnership in certain circumstances to dispose of the assets to the residual risk indemnifier.

A balancing adjustment event occurs for a depreciating asset if you stop holding the asset (paragraph 40-295(1)(a) of the ITAA 1997). The sale of the depreciating assets would, under either the put or the call option, constitute a balancing adjustment event for the assets held by the leasing partnership. The balancing adjustment event for each asset would occur at the time when the leasing partnership stops holding the asset. When that time occurs is a question of fact.

The call option to purchase an asset is exercised by giving the required notice. A period of time is then provided to complete the acquisition. Both events do not necessarily occur at the same time.

The relevant agreement specifies that disposal of the asset under the call option is effected by sale and purchase or by allocation.

In the case of disposal by sale and purchase the relevant agreement provides that, generally, the transfer of legal and equitable title to the purchaser and the delivery of possession of an asset must occur on the Completion Date. In this case, a balancing adjustment event will occur for the asset on the Completion Date for the asset because the leasing partnership would stop holding the asset at that time.

In the case of disposal by allocation, the relevant agreement provides that, generally, the transfer is effected by an allocation statement with the delivery of possession of an asset occurring at the allocation time. In this case, a balancing adjustment event will occur for the asset at the allocation time applicable to the asset because the leasing partnership would stop holding the asset at that time.

The put option to sell an asset may be exercised by giving the required notice. The disposal is required to be effected by the expiry date. Both events may not necessarily occur at the same time.

The relevant agreement provides that, generally, the purchase of an asset under the option, its transfer to the purchaser and the transfer of title to the asset must occur on the expiry date. To the extent that the sale of a depreciating asset is completed in those terms, a balancing adjustment event occurs for an asset on the expiry date because the leasing partnership stops holding the depreciating asset at that time.