Capital Allowances: second element of cost - balancing adjustment event - reasonably attributable costs

Does the taxpayer's capital expenditure on demolishing and removing their timber mill buildings form part of the second element of cost of those assets under paragraph 40-190(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The taxpayer's capital expenditure on demolishing and removing their timber mill buildings does form part of the second element of cost of those assets under paragraph 40-190(2)(b) of the ITAA 1997 because the timber mill buildings are depreciating assets to which Division 40 of the ITAA 1997 applies and the expenditure is reasonably attributable to a balancing adjustment event occurring for those assets.

The taxpayer ceased to carry on their business of milling timber for a taxable purpose.

The taxpayer incurred capital expenditure on demolishing and removing their timber mill buildings as part of various activities to return the land to its natural state. The expenditure was incurred after 30 June 2005.

Timber mill buildings are depreciating assets within the meaning of that term in section 40-30 of the ITAA 1997. However, Division 40 of the ITAA 1997 does not apply to depreciating assets that are capital works if the taxpayer can deduct, or could deduct in certain specified circumstances, amounts for the works under Division 43 of the ITAA 1997 (subsection 40-45(2) of the ITAA 1997). While timber mill buildings are capital works within the meaning of that term in section 43-20 of the ITAA 1997, amounts cannot generally be deducted for them under Division 43 of the ITAA 1997 because capital expenditure in respect of their construction or acquisition is specifically excluded from construction expenditure upon which the deduction is based (subparagraphs 43-70(2)(f)(vi) and 43-70(2)(fa)(iii) of the ITAA 1997). It follows that the taxpayer's timber mill buildings are depreciating assets to which Division 40 of the ITAA 1997 applies.

Paragraph 40-190(2)(b) of the ITAA 1997 includes in the second element of cost of a depreciating asset capital expenditure that is reasonably attributable to a balancing adjustment event occurring for the asset. When the taxpayer demolished and removed their timber mill buildings, a balancing adjustment event occurred for those assets under paragraph 40-295(1)(a) of the ITAA 1997 because the assets ceased to exist and the taxpayer stopped holding them. The cost of demolishing and removing the timber mill buildings is directly and integrally attributable to the balancing adjustment event that occurred for the assets.

Accordingly, the taxpayer's capital expenditure on demolishing and removing their timber mill buildings does form part of the second element of cost of those assets under paragraph 40-190(2)(b) of the ITAA 1997 because the timber mill buildings are depreciating assets to which Division 40 of the ITAA 1997 applies and the expenditure is reasonably attributable to the balancing adjustment occurring for those assets.