Issue
What is the termination value of a depreciating asset under Subdivision 40-D of the Income Tax Assessment Act 1997 (ITAA 1997) for an unincorporated association when the asset is transferred upon its incorporation?
Decision
The termination value of a depreciating asset being transferred is the sum of the amounts specified in items 1 and 2 in the table in paragraph 40-305(1)(b) of the ITAA 1997.
Facts
An unincorporated association converts to an incorporated association under the Associations Incorporation Act 1981 (Qld) (AIA (Qld)).
Before its incorporation, the unincorporated association had a liability to pay an amount related to some of the depreciating assets it held.
The constitution of the unincorporated association prevents it from making any distribution to members.
Reasons for Decision
When an unincorporated association incorporates under the AIA (Qld) a new entity comes into existence because the AIA (Qld) has no provision preserving the existence of an unincorporated association in the new incorporated association, nor does it provide that on incorporation the new incorporated association is a continuation of the unincorporated association.
The incorporation causes a balancing adjustment event to occur, under paragraph 40-295(1)(a) of the ITAA 1997, for the depreciating assets held by the unincorporated association as the ownership of the assets is passed to the incorporated association under subsection 23(1) of the AIA (Qld) (that is, a disposal has occurred).
Subsection 23(1) of the AIA (Qld) provides that 'on incorporation of an association, the association's assets, rights and liabilities become the incorporated association's assets, rights and liabilities'.
The termination value of a depreciating asset under a balancing adjustment event is worked out as at the time when the balancing adjustment event occurs. It is the amount specified in either subsection 40-300(2) or section 40-305 of the ITAA 1997 (subsection 40-300(1) of the ITAA 1997).
Items 1 and 2 of the table in paragraph 40-305(1)(b) of the ITAA 1997 apply in this case. Item 1 includes in the termination value an amount received under a balancing adjustment event while item 2 includes in the termination value the amount of a liability or part of a liability that is terminated under a balancing adjustment event.
The operation of subsection 23(1) of the AIA (Qld) means that no amount is received by the unincorporated association for the transfer of their depreciating assets to the incorporated association. As no amount is received under the balancing adjustment event the amount under item 1 of paragraph 40-305(1)(b) of the ITAA 1997 is nil.
The operation of subsection 23(1) of the AIA (Qld) also means that upon incorporation the incorporated association assumes the liabilities of the unincorporated association and the liabilities of the unincorporated association to pay an amount are terminated. In terms of item 2 of the table in paragraph 40-305(1)(b) of the ITAA 1997, the unincorporated association is taken to have received the amount of any liability or part of a liability that is terminated and that is related to the transfer of the depreciating assets.