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If the taxpayer has two or more qualifying replacement assets, does subsection 40-365(6) of the Income Tax Assessment Act 1997 (ITAA 1997) require the taxpayer to apportion an assessable balancing adjustment amount among all the replacement assets in proportion to their cost?

Yes. Subsection 40-365(6) of the ITAA 1997 requires the taxpayer to apportion an assessable balancing adjustment amount among all the replacement assets in proportion to their cost.

The taxpayer was required to supply their own tools to be used in their employment. The tools were stolen from the place of employment where they were stored.

The taxpayer received an insurance payout for the loss of the tools. An amount has been included in assessable income as a result of the calculation of the balancing adjustment amount for the stolen tools.

The taxpayer purchased numerous tools to replace the stolen tools. The conditions set out in subsections 40-365(2), 40-365(3) and 40-365(4) of the ITAA 1997 have been satisfied.

Section 40-365 of the ITAA 1997 allows a taxpayer to exclude some or all of a balancing adjustment amount from their assessable income where a depreciating asset is lost or destroyed. An amount may be excluded to the extent that the taxpayer chooses to apply the amount in reduction of: • the cost of the replacement asset, for the income year in which its start time occurs; or • the base value of the replacement asset, for a later year - that is, in reduction of the sum of its opening adjustable value for that year and any amount included in the second element of its cost for that year.

Subsection 40-365(6) of the ITAA 1997 provides that if the choice covers two or more replacement assets, the amount must also be apportioned between those items in proportion to their cost.

The Explanatory Memorandum for the New Business Tax System (Capital Allowances) Act 2001 states at paragraph 3.84: If a taxpayer is making the choice for 2 or more replacement assets, he or she must apportion the amount covered by the choice between those items in proportion to their cost. This limits arbitrage from, for instance, choosing replacement asset treatment for as much of the amount as can be allocated to very long effective life assets.

Subsection 40-365(6) of the ITAA 1997 effectively prevents the application of assessable balancing adjustment amount in reduction of the cost or opening adjustable value of selected replacement assets. The subsection requires the assessable balancing amount to be apportioned among all the qualifying replacement assets in proportion to their cost.

In this case, as the taxpayer is making the choice for two or more qualifying replacement assets, the assessable balancing adjustment amount must be apportioned among all of the qualifying replacement assets in proportion to their cost.