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Does CGT event K7 happen under section 104-235 of the Income Tax Assessment Act 1997 (ITAA 1997) where a balancing adjustment event occurs for a depreciating asset upon the amalgamation of Club A and Club B if the asset has been used to produce receipts that were not income because of the principle of mutuality?

Yes. CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset held which, while held, was used or installed ready for use for a purpose other than a taxable purpose. Any capital gain on disposal is reduced to the extent of the use other than for a taxable purpose. To the extent an asset is used to produce mutual receipts, the use is other than for a taxable purpose.

Club A and Club B are companies limited by guarantee and both are registered under the Registered Clubs Act 1976 (NSW) .

The members of both clubs voted at a general meeting to amalgamate.

Under the amalgamation, Club A is to be dissolved and Club B is to continue and is to acquire Club A's assets.

Club A is amalgamating with Club B within the terms of paragraph 17A(1)(b) of the Registered Clubs Act 1976 (NSW) which states that a reference to the amalgamation of two or more registered clubs is a reference to an amalgamation effected by the continuation of one of those clubs and the dissolution of the other club or clubs.

Club A has been placed in voluntary liquidation.

Section 104-235 of the ITAA 1997 provides that CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset which, at some time when it was held, had been used or installed ready for use for a purpose other than a taxable purpose.

The meaning of taxable purpose is set out in subsection 40-25(7) of the ITAA 1997 and includes the purpose of producing assessable income.

Receipts under the principle of mutuality do not constitute income and are not assessable. As a result, the use of depreciating assets in activities from which mutual receipts arise is not use for a taxable purpose.

Where a balancing adjustment event occurs for such a depreciating asset, a capital gain or loss arises to the extent of the non-taxable use and is worked out under section 104-240 (general case) or section 104-245 (pooled assets) of the ITAA 1997.