Capital Allowances: balancing adjustment event for common property depreciating assets - Australian Capital Territory

Does a balancing adjustment event occur, under paragraph 40-295(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), for a depreciating asset forming part of the common property of an existing residential unit complex located in the Australian Capital Territory (ACT) as a result of the enactment of the Unit Titles Act 2001 (ACT) (UTA 2001)?

Yes. A balancing adjustment event does occur, under paragraph 40-295(1)(a) of the ITAA 1997, for a depreciating asset forming part of the common property of an existing residential unit complex located in the ACT as a result of the enactment of the UTA 2001.

A taxpayer acquired a unit in a residential complex located in the ACT prior to 6 October 2001. The unit has been used to produce rental income since its acquisition.

Under this type of strata title development, the owners corporation becomes the holder of an estate of leasehold in the common property on registration of the units plan. The unit owners are members of the owners corporation which is a separate legal entity with specified powers, authorities, duties and functions.

Common property is that part of a strata plan not comprised in any owner's lot and includes both fixed and moveable property and facilities intended for common use. The common property may include depreciating assets and buildings and other structures.

The enactment of the UTA 2001, with effect from 6 October 2001, resulted in the estate of leasehold in the common property, including existing common property, in strata title developments in the ACT being held by the owners corporation as agent for the unit owners as tenants in common. Under the former act, Unit Titles Act 1970 (ACT) (UTA 1970), common property was held by the owners corporation (formerly body corporate) as trustee for the unit owners as tenants in common.

Paragraph 40-295(1)(a) of the ITAA 1997 provides that a balancing adjustment event occurs for a depreciating asset if an entity stops holding the asset.

Under the UTA 1970, depreciating assets forming part of common property were held by the owners corporation as trustee for the unit owners. In that capacity, the owners corporation was a holder of the common property under item 2 of the table in section 40-40 of the ITAA 1997.

Under the UTA 2001, the owners corporation holds the estate of leasehold in common property as agent for the unit owners. In this case, the unit owners as tenants in common and not the owners corporation hold the depreciating assets forming part of the common property. Each unit owner is a holder under item 2 of the table in section 40-40 of the ITAA 1997.

For existing strata title developments, the owners corporation stopped holding the depreciating assets forming part of the common property as a result of the enactment, from 6 October 2001, of the UTA 2001. The effect of this is that a balancing adjustment event occurred, under paragraph 40-295(1)(a) of the ITAA 1997, for those depreciating assets forming part of existing common property.