Uniform Capital Allowances - Balancing adjustment on the death of the owner of a depreciating asset.

What is the balancing adjustment amount under section 40-285 of the Income Tax Assessment Act 1997 (ITAA 1997) for the owner of a depreciating asset when the asset passes to the legal personal representative on the death of the owner?

The balancing adjustment amount worked out under section 40-285 of the ITAA 1997 is nil.

The taxpayer, a sole trader, purchased a depreciating asset costing $20,000 on 28 August 2001. The decline in value of the asset was worked out under Subdivision 40-B of the ITAA 1997. The taxpayer used the asset solely for the purpose of producing assessable income. The taxpayer died on 28 February 2002 and the asset passed to the legal personal representative. At the time of death, the asset's adjustable value was $17,000.

The taxpayer stopped holding the asset at the time of their death. Accordingly, a balancing adjustment event occurred for the asset under paragraph 40-295(1)(a) of the ITAA 1997. To work out the balancing adjustment amount, section 40-285 of the ITAA 1997 requires a comparison of the asset's termination value and its adjustable value just before the balancing adjustment event occurred. If the termination value is more than the adjustable value, the excess is included in the assessable income under subsection 40-285(1) of the ITAA 1997 as an assessable balancing adjustment amount. If the termination value is less than the adjustable value, the difference can be deducted under subsection 40-285(2) of the ITAA 1997 as a deductible balancing adjustment amount.

When the taxpayer stopped holding the asset and the asset passed to the legal personal representative, item 9 of the termination value table in subsection 40-300(2) of the ITAA 1997 provides that the termination value of the asset is its adjustable value at the time of death (ie $17,000).

As the termination value and the adjustable value are the same, the balancing adjustment amount is nil. Consequently, there is no amount to be either included in assessable income under subsection 40-285(1) of the ITAA 1997 or deducted under subsection 40-285(2) of the ITAA 1997.

There are no capital gains tax implications for the asset because: • Subsection 118-24(1) of the ITAA 1997 provides that any capital gain or loss that a taxpayer makes from a CGT event, that is also a balancing adjustment event that happens to a depreciating asset the taxpayer held, is to be disregarded if the decline in value of the asset was worked out under Division 40 of the ITAA 1997. • Subsection 118-24(2) of the ITAA 1997 provides exclusions to the rules in subsection 118-24(1) of the ITAA 1997, including where a taxpayer makes a capital gain or capital loss from CGT event K7 (section 104-235 of the ITAA 1997) happening. CGT event K7 does not apply as the taxpayer used the asset solely for a taxable purpose. The other exclusions in subsection 118-24(2) of the ITAA 1997 also do not apply.

Date of Amendment Part Comment 13 February 2015 Title Replace 'depreciable asset' with 'depreciating asset' for consistency Issue Amend for clarity Decision Amend for clarity Facts Replace references to 'Mr A' with 'the taxpayer' for consistency Reasons for Decision Insert explanations of the calculation of the balancing adjustment amount and when it is assessable or deductible Legislative References Insert reference to subsection 118-24(1) and 118-24(2) of the ITAA 1997

Date of Amendment | Part | Comment

13 February 2015 | Title | Replace 'depreciable asset' with 'depreciating asset' for consistency

Issue | Amend for clarity

Decision | Amend for clarity

Facts | Replace references to 'Mr A' with 'the taxpayer' for consistency

Reasons for Decision | Insert explanations of the calculation of the balancing adjustment amount and when it is assessable or deductible

Legislative References | Insert reference to subsection 118-24(1) and 118-24(2) of the ITAA 1997