Assessable recoupment on sale of a depreciating asset

Is an amount a taxpayer received for the sale of a depreciating asset for its market value an assessable recoupment under Subdivision 20-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The amount a taxpayer received for the sale of a depreciating asset for its market value is not an assessable recoupment under Subdivision 20-A of the ITAA 1997.

A taxpayer owned depreciating assets which it used in a business.

The taxpayer incurred expenditure on the initial construction or purchase of the assets. The taxpayer sold the assets to another taxpayer. The sale price was determined by an arm's-length negotiation between the seller and purchaser having regard to the state, condition and commercial value of the items at the time of sale.

Subdivision 20-A of the ITAA 1997 only includes an amount in assessable income if the taxpayer receives the amount as an assessable recoupment. Section 20-20 of the ITAA 1997 provides that an assessable recoupment will arise if: • an amount is received as recoupment, and • the recoupment is of a loss or outgoing .

Subsection 20-25(1) of the ITAA 1997 generally defines recoupment of a loss or outgoing to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery (however described), and a grant in respect of the loss or outgoing.

Subsections 20-25(2), (3) and (4) of the ITAA 1997 extend this general definition to include certain amounts to be taken to have been received as recoupment of a loss or outgoing. To the extent that an amount forms part of the termination value of property, however, it is not recoupment of a loss or outgoing (subsection 20-25(5) of the ITAA 1997).

Subsection 20-30(1) of the ITAA 1997 provides a table of the deductions under the ITAA 1997 for which recoupments are generally assessable under Subdivision 20-A of the ITAA 1997. If the amount received is not a recoupment within the meaning of that term in section 20-25 of the ITAA 1997, or if the recoupment is not of a loss or outgoing, then the amount cannot be an assessable recoupment for the purposes of Subdivision 20-A of the ITAA 1997.

Whether an amount a taxpayer receives for the sale of a depreciating asset they held is recoupment of a loss or outgoing is to be determined by reference to the substance of the transaction between the parties.

In this case, the sale price was determined by an arm's-length negotiation between the seller and purchaser having regard to the state, condition and commercial value of the items at the time of the sale. The fact that it was calculated by reference to the value of what was sold rather than by reference to the owner's expenditure supports the conclusion that it is not in substance recoupment of the owner's expenditure. The sale price can be characterised as the proceeds of the sale of the asset rather than as recoupment of a loss or outgoing of the former owner. This recognises that while any amount received due to the sale of the asset effectively recovers losses or outgoings incurred on the asset, generally, the amount is not compensation for any underlying loss or outgoing. Furthermore, subsection 20-25(5) of the ITAA 1997 provides that to the extent that an amount forms part of the termination value of property it is not recoupment of a loss or outgoing.

The sale price of a depreciating asset that is the market value of the asset is not a grant, reimbursement, refund, indemnity or recovery within the ordinary meanings of those words, in respect of a loss or outgoing in acquiring the asset. Nor is it an amount received by way of a contract of insurance.