Capital Allowances: balancing adjustment event for a partnership depreciating asset

Does a balancing adjustment event occur under subsection 40-295(2) of the Income Tax Assessment Act 1997 (ITAA 1997) for a depreciating asset held by a partnership under item 7 of the table in section 40-40 of the ITAA 1997 when there is a change of interests in a partnership?

Yes. Subsection 40-295(2) of the ITAA 1997 provides that a balancing adjustment event does occur where there is a change in the interests of the partners in a partnership holding a depreciating asset.

Partnership ABC carries on a business. The partnership holds a depreciating asset, which was acquired after 1 July 2001 and is used exclusively for a taxable purpose. In the 2001-02 income year, Partner A decides to leave the partnership. Partner A sells their interest in the partnership to D on 30 June 2002. A new partnership is formed. Partners B and C each retained their existing interest. Partners B, C and D will continue to use the depreciating asset in their new business.

As there has been a variation in the partnership, rollover relief is available under subsection 40-340(3) of the ITAA 1997 where the transferor (partners A, B and C in partnership ABC) and transferee (partners D, B and C in partnership BCD) jointly choose the rollover. In this case the entities concerned have not elected to choose roll over relief that is available under section 40-340 of the ITAA 1997.

A depreciating asset that is a partnership asset is held by the partnership and not by any particular partner, either alone or jointly with the other partners (item 7 of the table in section 40-40 of the ITAA 1997).

A holder of a depreciating asset must make a balancing adjustment to their assessable income if a balancing adjustment event occurs for the asset and the asset's decline in value is worked out under Subdivision 40-B of the ITAA 1997. The amount of the balancing adjustment is worked out under section 40-285 of the ITAA 1997 by comparing the asset's termination value with its adjustable value.

Section 40-300 of the ITAA 1997 provides that the termination value of a depreciating asset is worked out as at the time when a balancing adjustment event occurs. The termination value is, in certain circumstances, an amount specified in the table in subsection 40-300(2) of the ITAA 1997 or, more generally, the amount taken to have been received under section 40-305 of the ITAA 1997.

Subsection 40-295(2) of the ITAA 1997 provides that a balancing adjustment event occurs for a depreciating asset when there is a change of interests in a partnership asset.

Therefore, when A sells their ownership interest in the partnership asset to D a balancing adjustment event occurs for partnership ABC on 30 June 2002, which is taken to have disposed of the asset to partnership BCD.

The termination value of the depreciating asset where subsection 40-295(2) of the ITAA 1997 applies is worked out under item 5 of the table in subsection 40-300(2) of the ITAA 1997. That item provides that the termination value is the market value of the asset when the balancing adjustment event occurred.

Partnership ABC is required to work out the balancing adjustment amount under section 40-285 of the ITAA 1997 by comparing the adjustable value to the termination value. The balancing adjustment amount must be taken into account when calculating the net income or loss of the partnership.