Capital Allowances: balancing adjustment where no depreciation has been deducted - former depreciation provisions

Can the taxpayer deduct an amount under section 42-224 of the Income Tax Assessment Act 1997 (ITAA 1997) if they dispose of plant they own and no deduction for depreciation was available for the plant?

Yes. Section 42-224 of the ITAA 1997 allows the taxpayer to deduct the excess of the plant's reduced cost base over its termination value if a deduction for depreciation was not available for the plant and it was disposed of after 11.45am, by legal time in the Australian Capital Territory, on 21 September 1999 and before 1 July 2001.

A taxpayer that operated a manufacturing business owned depreciable plant that they had purchased after 21 September 1999. The plant was not compatible with the taxpayer's production equipment and techniques and was never used, or installed ready for use, by the taxpayer for the purpose of producing assessable income. The taxpayer did not deduct any depreciation for the plant. The plant was later either sold or scrapped prior to 1 July 2001 and the termination value of the plant was less than its reduced cost base. None of the exceptions in section 42-198 of the ITAA 1997 applied to the plant.

Generally, before 1 July 2001, a balancing adjustment event under subsection 42-30(3) of the ITAA 1997 occurred when you disposed of plant or when it was lost or destroyed.

You must make a balancing adjustment calculation for plant if a balancing adjustment event occurs after 21 September 1999 and before 1 July 2001 and no deduction for depreciation was available (subsection 42-30(2A) of the ITAA 1997). The balancing adjustment is calculated under Subdivision 42-GA of the ITAA 1997 (subsection 42-30(2B) of the ITAA 1997). The balancing adjustment calculation may include an amount in your assessable income or allow you to deduct an amount and must be made in the year in which a balancing adjustment event occurs (section 42-222 of the ITAA 1997).

A balancing adjustment event occurred for the taxpayer's plant when it was sold or scrapped after 21 September 1999 and prior to 1 July 2001. A deduction for depreciation for the plant was not available because it was not used, or installed ready for use, for the purpose of producing assessable income. Because the taxpayer disposed of the plant before a deduction for depreciation was available for it, a balancing adjustment calculation under Subdivision 42-F of the ITAA 1997 is not required. However a balancing adjustment calculated under Subdivision 42-GA of the ITAA 1997 is required.

Subdivision 42-GA of the ITAA 1997 allows a deduction for the amount by which the plant's termination value is less than its reduced cost base (section 42-224 of the ITAA 1997). It does not matter that a former owner may have claimed depreciation deductions for the plant.