Capital Allowances: balancing adjustment - termination value - demolition expenses

Is the termination value of the taxpayer's depreciating asset reduced, under subsection 40-315(1) of the Income Tax Assessment Act 1997 (ITAA 1997), by the fee they paid to an external contractor to demolish the asset?

Yes. The termination value of the taxpayer's depreciating asset is reduced by the fee they paid to an external contractor to demolish the asset because the fee satisfies the conditions in subsection 40-315(1) of the ITAA 1997.

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 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.

Removing the old depreciating asset by dismantling and demolishing it caused a balancing adjustment event to occur for the asset because the taxpayer stopped holding it (paragraph 40-295(1)(a) of the ITAA 1997). 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, a balancing adjustment is required (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. Termination value is worked out as at the time the balancing adjustment event occurs (subsection 40-300(1) of the ITAA 1997) and, in this case, the termination value of the old depreciating asset is the amount received from the scrap dealer (item 1 of the table in paragraph 40-305(1)(b) of the ITAA 1997).

Section 40-315 of the ITAA 1997 provides a reduction in the termination value of a depreciating asset for expenses that are reasonably attributable to the balancing adjustment event occurring for the asset if they are not otherwise deductible. In this case, the fee paid to the external contractor to demolish and remove the remaining part of the old depreciating asset is reasonably attributable to the balancing adjustment event that occurred for the asset because the demolition and removal was integral to the taxpayer ceasing to hold that asset. Additionally, the fee is capital expenditure that is not otherwise deductible.

It follows that the termination value of the old depreciating asset (being the amount received from the scrap dealer) is reduced by the fee paid to the external contractor.