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Does a balancing adjustment event occur, under paragraph 40-295(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), for the depreciating assets of an unincorporated association upon its incorporation under the Associations Incorporation Act 1981 (Qld) (AIA (Qld))?

Yes. A balancing adjustment event occurs under paragraph 40-295(1)(a) of the ITAA 1997 for the depreciating assets as the unincorporated association stops holding the assets when they are transferred to the incorporated successor upon its incorporation.

An unincorporated association is the owner of depreciating assets for income tax purposes.

The constitution of the unincorporated association prevents it from making any distribution to members.

The unincorporated association converts to an incorporated association under the AIA (Qld).

Paragraph 40-295(1)(a) of the ITAA 1997 provides that a balancing adjustment event occurs when an entity stops holding an asset. The table in section 40-40 of the ITAA 1997 sets out who is the holder of an asset in any particular circumstances. Item 10 of that table provides that the owner, or if there is both a legal and equitable owner, the legal owner of a depreciating asset is the holder of the asset. Therefore, prior to incorporation, the unincorporated association is the holder of the depreciating assets pursuant to item 10 of the table in section 40-40 of the ITAA 1997.

It is considered that a new entity comes into existence on incorporation because the AIA (Qld) has no provision preserving the existence of an unincorporated association in the new incorporated association, nor does it provide that on incorporation the new incorporated association is a continuation of the unincorporated association.

Subsection 23(1) of the AIA (Qld) provides that 'on incorporation of an association, the association's assets, rights and liabilities become the incorporated association's assets, rights and liabilities'.

On the transfer of the depreciating assets to the incorporated association a change of ownership of the assets occurs (that is, a disposal). Consequently, a balancing adjustment event occurs under paragraph 40-295(1)(a) of the ITAA 1997 as the unincorporated association no longer holds the depreciating assets.