Division 40: balancing adjustment amount - partnership asset

Will a balancing adjustment amount, as worked out under section 40-285 of the Income Tax Assessment Act 1997 (ITAA 1997), that arises on the disposal of a depreciating asset held by the leasing partnership be taken into account in calculating the net income or loss (as the case may be) of the partnership?

Yes, any balancing adjustment amount (as worked out under section 40-285 of the ITAA 1997) that arises on the disposal of an asset held by the partnership will be taken into account by the partnership.

A partnership purchased various depreciating assets under a manufacture and supply agreement. The partnership immediately leased the assets on commercial terms to an unrelated entity that had been awarded a franchise by another unrelated party to operate a business in which the assets are used. As part of an arrangement with the partnership, the franchisor was granted a call option over the leased assets so that, on exercising the option in certain circumstances to purchase the assets, the franchisor can make the assets available to a subsequent franchisee.

A disposal by sale of the depreciating assets held by the leasing partnership to the franchisor pursuant to the franchisor's exercise of the call option constitutes a balancing adjustment event occurring for the assets. A balancing adjustment event will occur because the holder of the depreciating asset, the leasing partnership, will stop holding the asset (paragraph 40-295(1)(a) of the ITAA 1997). Any balancing adjustment amount that arises from such an event occurring will, consequently, need to be dealt with by the partnership as the holder of the assets.

A balancing adjustment amount is included in the assessable income of the leasing partnership (the former holder of the depreciating assets) if the termination value of an asset is more than its adjustable value just before the balancing adjustment event occurred (subsection 40-285(1) of the ITAA 1997). A balancing adjustment amount is allowed as a deduction from the assessable income of the leasing partnership if an asset's termination value is less than its adjustable value just before the balancing adjustment event occurred (subsection 40-285(2) of the ITAA 1997). The termination value of a depreciating asset is worked out as at the time the balancing adjustment event occurs (subsection 40-300(1) of the ITAA 1997).