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Does a balancing adjustment event occur under paragraph 40-295(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) where a taxpayer purchases a depreciating asset, to be used in their business, that fails to operate from its inception?

Yes. A balancing adjustment event occurs for the depreciating asset under paragraph 40-95(1)(c) of the ITAA 1997 as taxpayer has decided never to use the depreciating asset and it has never been installed ready for use.

The taxpayer purchased a depreciating asset to be used in their business. The depreciating asset was to be used entirely for a taxable purpose.

The depreciating asset failed to work from its inception. Attempts to repair the depreciating asset were unsuccessful and the supplier refused to provide a replacement. The matter was then taken to Court and the taxpayer was successful, but the supplier went into liquidation before the taxpayer could enforce the Court's findings. The taxpayer then abandoned the depreciating asset.

Paragraph 40-295 (1)(c) of the ITAA 1997 provides that a balancing adjustment event occurs for a depreciating asset if 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.

There is no requirement that the depreciating asset be sold or otherwise disposed of. It is sufficient that it will never be used.

When the depreciating asset was purchased by the taxpayer, it failed to operate from its inception. As the taxpayer has not used the asset and has decided never to use it, a balancing adjustment event occurs for the depreciating asset under paragraph 40-295(1)(c) of the ITAA 1997.