Issue
Are partners treated under section 106-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as having an individual interest in a partnership CGT asset, where the asset is a depreciating asset and CGT event K7 in section 104-235 of the ITAA 1997 happens in relation to that asset?
Decision
No. Partners in a partnership are not treated as having an individual interest in the depreciating asset; the partners have an interest under section 106-5 of the ITAA 1997 in the capital gain or capital loss as worked out under sections 104-240 and 104-245 of the ITAA 1997 when CGT event K7 happens in relation to the depreciating asset.
Facts
A husband and wife partnership purchased a boat in July 1998 for $316,413. The boat was used in the partnership business of a boat charter operation.
The boat was wholly used for taxable purposes until 30 June 2003.
Depreciation deductions totalling $304,451 were claimed for the boat while it was used for taxable purposes. For the purposes of Division 40 of the ITAA 1997, the partnership holds the boat.
From 1 July 2003, the boat has been held for 100% non-taxable use and no further deductions for depreciation have been made.
The taxpayer anticipates selling the boat in the near future for approximately $300,000.
Reasons for Decision
Under subsection 106-5(1) of the ITAA 1997 any capital gain or capital loss from a CGT event happening in relation to a partnership CGT asset is made by the partners individually, and not the partnership. Subsection 106-5(2) of the ITAA 1997 further provides that each partner has a separate cost base and reduced cost base for the partner's interest in each CGT asset of the partnership.
Ordinarily, a capital gain or capital loss made from a CGT event (that is also a balancing adjustment event) that happens to a depreciating asset is disregarded under subsection 118-24(1) of the ITAA 1997.
However, subsection 118-24(2) of the ITAA 1997 states that the provision in subsection 118-24(1) does not apply, if the capital gain or capital loss is made when CGT event K7 happens in relation to the depreciating asset.
CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset you held and at some time when you held the asset, you used it, or had it installed ready for use, for a purpose other than a taxable purpose.
Any capital gain or capital loss made from CGT event K7 happening is worked out under sections 104-240 and 104-245 of the ITAA 1997. The capital gain or capital loss is calculated by reference to the concepts found in Division 40 of the ITAA 1997 (for example, cost and termination value) and not from those found in the CGT provisions.
Accordingly, the CGT concepts of cost base and capital proceeds are not relevant for calculating the capital gain or capital loss when CGT event K7 happens.
Under Division 40 of the ITAA 1997, the partnership (and not the individual partners) is treated as the owner or holder of the depreciating asset (item 7 of the table in section 40-40 of the ITAA 1997). The Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill of 2001 explaining Division 40 states at paragraph 1.45 that: Where a depreciating asset is or becomes a partnership asset, it is appropriate to identify the partnership as being the economic owner of the asset. Thus, the partnership, and not any individual partner, is regarded as holding the asset. This is consistent with the structure of the income tax law, under which the partnership is a notional taxpayer arriving at a tax position which is then allocated out between the partners.
Consequently, in this case, when CGT event K7 happens, the capital gain or capital loss is calculated by reference to the partnership as the holder of the depreciating asset, rather than by an individual partner.
Accordingly, under section 106-5 of the ITAA 1997, the partners have an interest in the capital gain or capital loss as calculated by reference to the partnership as the holder of the depreciating asset, rather than by having an individual interest in the depreciating asset.
Amendment History
Date of Amendment Part Comment 4 January 2019 Reasons for Decision Minor punctuation change 1 October 2014 Legislative references Include all references quoted in ATO ID. Other references Include reference to explanatory memorandum.
Date of Amendment | Part | Comment
4 January 2019 | Reasons for Decision | Minor punctuation change
1 October 2014 | Legislative references | Include all references quoted in ATO ID.
Other references | Include reference to explanatory memorandum.