Capital Allowances - CGT event K7

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 income that was not assessable income because of the principle of mutuality?

Yes. CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset that was held and while it was held the asset was used for a purpose other than a taxable purpose. The use of an asset to produce mutual income is use 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) .

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 2 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.

As a result of the amalgamation Club A is to be dissolved and Club B is to take over its assets.

Club B had previously loaned an amount to Club A. The loan was secured by mortgage and made on condition that Club A would repay the loan within a period of 12 months or amalgamate with Club B. The loan was not repayable if the clubs amalgamated.

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

Club A was 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 and at some time when the asset was held it 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. As mutual income is not assessable income of Club A, the use of depreciating assets in relation to activities from which mutual income is derived 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 sections 104-240 (general case) or 104-245 (pooled assets) of the ITAA 1997.