Issue
Can a former STS taxpayer continue to claim a deduction under subsection 328-185(1) or 328-210(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for an STS pool balance where it has disposed of the depreciating assets giving rise to that pool balance?
Decision
Yes. A former STS taxpayer continues to claim an STS pool deduction under subsection 328-185(1) or 328-210(1) of the ITAA 1997 in an income year after the income year in which it ceases to carry on a business and disposes of its depreciating assets provided that in the later income year: (a) the entity continues to exist; and (b) the entity has a positive opening pool balance under subsection 328-195(2) of the ITAA 1997.
Facts
An individual had been carrying on a business as a sole trader. They were an STS taxpayer in the 2001-02 income year. Part way through that year, they sell their business and all of the business assets including all depreciating assets. By the start of the 2002-03 income year, they have sold all their assets and are not carrying on any business. The closing pool balance of their general STS pool for the 2001-02 income year as worked out using the method statement in section 328-200 of the ITAA 1997 is $2,000. The individual has an opening pool balance for the 2002-03 income year of $2,000.
Reasons for Decision
Subsection 328-220(1) of the ITAA 1997 provides that the STS capital allowance rules in Subdivision 328-D of the ITAA 1997 continue to apply to an entity's STS capital allowance pool(s) in an income year after the income year in which the entity ceases to be an STS taxpayer. This is so regardless of whether the entity has ceased to carry on a business and/or hold the depreciating assets allocated to the STS pool in the later income year. This outcome is set out at paragraph 5.82 of the Explanatory Memorandum of the New Business Tax System (Simplified Tax System) Act 2001.
For the rule in subsection 328-220(1) of the ITAA 1997 to apply however, it is necessary that the entity that was the STS taxpayer continues to exist as an entity for tax purposes in the later income year. This is because there needs to be an entity able to claim the relevant amount as an allowable deduction in the later year.
The individual in this case continues as an entity even once they cease to be a sole trader. They also have a positive opening pool balance for the 2002-03 income year of $2,000. Under subsection 328-220(1) of the ITAA 1997 the individual will need to continue to apply the rules in Subdivision 328-D of the ITAA 1997 to that pool. Under those rules, the individual will be able to claim a deduction in respect of the pool for the 2002-03 and later income years. In the later income year in which the pool value (as worked out under subsection 328-210(2) of the ITAA 1997) falls to less than $1,000, the individual will be able to deduct the full amount of the remaining pool balance and treat the pool as exhausted.