Issue
In working out the termination value of depreciating assets sold with a rental property for a single undissected amount, is it reasonable to attribute, under section 40-310 of the Income Tax Assessment Act 1997 (ITAA 1997), the single amount received to each depreciating asset in proportion to the relevant market value of each of the assets?
Decision
Yes. It is reasonable to attribute, under section 40-310 of the ITAA 1997, the single amount received for all the assets to each depreciating asset in proportion to the relevant market value of each of the assets.
Facts
The taxpayer sold a rental property in an arm's length transaction. The sale included a number of depreciating assets. There was no agreed allocation of the sale price to the separate assets included in the sale.
Reasons for Decision
The termination value of a depreciating asset is worked out as at the time when a balancing adjustment event occurs (section 40-300 of the ITAA 1997). It is, in certain circumstances, an amount specified in the table in subsection 40-300(2) of the ITAA 1997 or, more generally, the amount taken to have been received under section 40-305 of the ITAA 1997.
Where a single undissected amount is received for two or more things, including a depreciating asset subject to a balancing adjustment event, only that part of the amount received that is reasonably attributable to the depreciating asset will be taken into account as its termination value (section 40-310 of the ITAA 1997).
What is reasonable will often depend upon the particular circumstances. As set out in Taxation Determination TD 98/24, it is expected that the vendor, in making an apportionment, will generally have regard to and be able to justify their reasonable apportionment based on the relevant market values of the separate depreciating assets at the time of the making of the contract.
The Commissioner does not accept that the adjustable value of a depreciating asset necessarily represents the market value of the asset.