Capital allowances: balancing adjustment - depreciating assets and capital expenditure of primary producers

Do the balancing adjustment provisions of Subdivision 40-D of the Income Tax Assessment Act 1997 (ITAA 1997) apply to depreciating assets whose decline in value is worked out under Subdivision 40-F of the ITAA 1997 or to capital expenditure that is deductible under Subdivision 40-G of the ITAA 1997?

No. The sale of a depreciating asset does not require a balancing adjustment under section 40-285 of the ITAA 1997 where the decline in value of the asset is worked out under Subdivision 40-F of the ITAA 1997 or if an amount of capital expenditure is deductible under Subdivision 40-G of the ITAA 1997.

The taxpayer owned depreciating assets that it used in a primary production business on land in Australia. The taxpayer carried on a business of horticulture on land it owned. The taxpayer incurred qualifying expenditure on water facilities (subsections 40-525(1) and 40-555(2) of the ITAA 1997) and horticultural plants (subsection 40-525(2) and 40-555(3) of the ITAA 1997) and satisfied conditions for deductions.

In addition, the taxpayer incurred capital expenditure on landcare, a mains electricity connection and a telephone line that qualified for deductions under Subdivision 40-G of the ITAA 1997.

The taxpayer sold the land and the depreciating assets to another taxpayer.

A taxpayer must make a balancing adjustment to their assessable income if a balancing event occurs for a depreciating asset that a taxpayer holds and the decline in value of the asset was worked out under Subdivision 40-B of the ITAA 1997.

Subsection 40-50(1) of the ITAA 1997 provides that Subdivision 40-B of the ITAA 1997 does not apply where a taxpayer can work out the decline in value of a depreciating asset under Subdivision 40-F of the ITAA 1997 (primary production depreciating assets) or deduct an amount for capital expenditure under Subdivision 40-G of the ITAA 1997 (capital expenditure for primary producers and other landholders). This is because subsection 40-50(1) of the ITAA 1997 gives precedence for the deduction to Subdivisions 40-F and 40-G of the ITAA 1997 over Subdivision 40-B of the ITAA 1997. Therefore, a balancing adjustment is not required under section 40-285 of the ITAA 1997 as the decline in value of these depreciating assets and the deduction for capital expenditure is not worked out under Subdivision 40-B of the ITAA 1997.

While the sale of the assets cannot result in a balancing adjustment, the sale may result in a capital gain or a capital loss under Part 3-1 of the ITAA 1997.