Capital Allowances: balancing adjustment event - demolition of depreciating asset

Does a balancing adjustment event occur for the taxpayer's depreciating asset under paragraph 40-295(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) if the taxpayer demolishes the asset?

Yes. The demolition of the taxpayer's depreciating asset constitutes a balancing adjustment event occurring for the asset under paragraph 40-295(1)(a) of the ITAA 1997 because the taxpayer stops holding 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. Removal of the old asset commenced almost immediately after the new asset became fully operational. Removing the old asset involved some dismantling by the taxpayer and some demolition by an external contractor.

Subsection 40-295(1) of the ITAA 1997 states that a balancing adjustment event occurs for a depreciating asset if: (a) you stop *holding the asset; (b) you stop using it, or having it *installed ready for use, for any purpose and you expect never to use it, or have it installed ready for use, again; or (c) you have not used it and: (i) if you have had it installed ready for use - you stop having it so installed; and (ii) you decide never to use it. * denotes a term defined in subsection 995-1(1) of the ITAA 1997

In this case, the taxpayer is the legal owner of the old depreciating asset and a holder of it under item 10 of the table in section 40-40 of the ITAA 1997. The old asset ceased to exist once it was dismantled, demolished and removed in the circumstances described. That is, at the completion of this process, there is no depreciating asset for the taxpayer to hold.

In these circumstances, the taxpayer stops holding the old depreciating asset causing a balancing adjustment event to occur for the asset under paragraph 40-295(1)(a) of the ITAA 1997.