Capital Allowances: balancing adjustment - termination value less than zero - demolition expenses

For the purpose of working out a balancing adjustment under section 40-285 of the Income Tax Assessment Act 1997 (ITAA 1997), is the termination value of the taxpayer's depreciating asset less than zero if the qualifying expenses of the asset's balancing adjustment event exceed the asset's termination value?

No. For the purpose of working out a balancing adjustment under section 40-285 of the ITAA 1997, the termination value of the taxpayer's depreciating asset is zero if the qualifying expenses of the balancing adjustment event exceed the termination value of the asset.

The taxpayer affixed to their land a new depreciating asset to replace an older model of the asset. The new asset was installed at a different site on the land to the old asset. The old asset continued to be used until the new one was fully operational. Once replaced, it was necessary for safety reasons to remove the old depreciating asset. Removing the old asset involved some dismantling by the taxpayer and some demolition by an external contractor. The taxpayer sold the parts it dismantled to a scrap dealer. The taxpayer paid a fee to the external contractor to demolish and dispose of the remaining part of the old asset. The fee paid to the external contractor exceeded the amount received from the scrap dealer. The cost of removing the old depreciating asset is capital expenditure and not deductible to the taxpayer under any provision of the ITAA 1997 outside Division 40 of the ITAA 1997.

A balancing adjustment is required if a balancing adjustment event occurs for a depreciating asset whose decline in value is worked out under Subdivision 40-B of the ITAA 1997 (section 40-285 of the ITAA 1997). Broadly speaking, a balancing adjustment is the difference between the asset's termination value and its adjustable value and is either included in or allowed as a deduction from assessable income.

For the purpose of working out a balancing adjustment under section 40-285 of the ITAA 1997, the termination value of a depreciating asset has the meaning given by section 40-300 of the ITAA 1997. If an item in the table in subsection 40-300(2) of the ITAA 1997 applies, the termination value is the amount specified in that item. Otherwise, the termination value is the amount you are taken to have received under section 40-305 of the ITAA 1997.

The amount worked out as the termination value of a depreciating asset may be reduced, under section 40-315 of the ITAA 1997, for expenses that are reasonably attributable to the balancing adjustment event occurring for the asset if they are not otherwise deductible. The fee paid to the external contractor in this case satisfies these requirements.

As no item in the table in subsection 40-300(2) of the ITAA 1997 applies, the termination value of the taxpayer's depreciating asset is the amount worked out under section 40-305 of the ITAA 1997. Section 40-305 applies to treat certain amounts as having been received under a balancing adjustment event. The word 'amount' of itself connotes a sum total to which items amount up (see EMI (Aust) Ltd v. FC of T 71 ATC 4112; (1971) 2 ATR 325). In the context of section 40-305, what is sought as the 'amount' is a quantitative statement of what the buyer promises, expressly or tacitly, to pay to, or for, the seller in order that he, the buyer, may get a good title to goods that he has agreed to buy (again see EMI (Aust) Ltd v. FC of T 71 ATC 4112; (1971) 2 ATR 325). In an ordinary sense, an amount less than zero is not received. This is supported by the definition of the word 'amount' in subsection 995-1(1) of the ITAA 1997 to include a nil amount.

Reducing the termination value of a depreciating asset for the purpose of section 40-285 of the ITAA 1997 seeks to recognise those expenses reasonably attributable to the balancing adjustment event to the extent they would not otherwise be deducted. The reduction ensures that only that part of the termination value of the asset that exceeds these expenses is taken into account for the purpose of the comparison of termination value and adjustable value (that is, the balancing adjustment) in section 40-285. This means that the reduction under section 40-315 of the ITAA 1997 is not a simple mathematical equation that can result in a termination value less than zero for the purpose of the comparison.

For the purpose of working out a balancing adjustment under section 40-285 of the ITAA 1997, therefore, the termination value of the taxpayer's depreciating asset is zero.