Issue
Does item 5 of the table in subsection 40-180(2) of the Income Tax Assessment Act 1997 (ITAA 1997) apply in working out the first element of cost of a depreciating asset when it begins to be held by a new partnership under item 7 of the table in section 40-40 of the ITAA 1997 following a balancing adjustment event under subsection 40-295(2) of the ITAA 1997?
Decision
Yes. Item 5 of the table in subsection 40-180(2) of the ITAA 1997 provides that the first element of cost of the depreciating asset that a new partnership starts to hold is its market value at the time the change referred to in subsection 40-295(2) of the ITAA 1997 occurred.
Facts
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 on the same date. Partners B and C each retain 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.
Reasons for Decision
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).
When A sold their interest in the partnership asset to D a balancing adjustment event occurred under 40-295(2) of the ITAA 1997 for partnership ABC, which is taken to have disposed of the asset to partnership BCD.
The first element of cost of a depreciating asset is worked out at the same time when the asset starts to be held. In certain circumstances, the cost is the amount specified in section 40-180 of the ITAA 1997. Otherwise, the cost is worked out under section 40-185 of the ITAA 1997.
As a particular item in the table in subsection 40-180(2) of the ITAA 1997 applies that item will determine the first element of cost of a depreciating asset now held by partnership BCD.
Item 5 of the table in subsection 40-180(2) of the ITAA 1997 provides that the cost of the depreciating asset is its market value at the time the change referred to in subsection 40-295(2) of the ITAA 1997 occurred.
In this case when partnership BCD starts to hold the asset, the first element of cost will be the market value of the depreciating asset on 30 June 2002 under item 5 of the table in subsection 40-180(2) of the ITAA 1997.
Furthermore, as partnership BCD (and not each partner) is the holder of the asset, only the partnership is entitled to determine a cost and effective life and choose a method in order to work out a deduction for the decline in value of the asset under section 40-25 of the ITAA 1997.