Capital Allowances: starting to hold a depreciating asset previously held by an exempt entity

Does the taxpayer 'acquire' a depreciating asset from the Commonwealth, a State, a Territory or an exempt entity as required in paragraph 58-5(4)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) where it starts to hold the depreciating asset under section 40-40 of the ITAA 1997 which immediately before was held by an exempt entity?

Yes. The taxpayer does acquire a depreciating asset from the Commonwealth, a State, a Territory or an exempt entity as required in paragraph 58-5(4)(a) of the ITAA 1997 where it starts to hold the depreciating asset under section 40-40 of the ITAA 1997 which immediately before was held by an exempt entity because the taxpayer is the first entity to hold the asset whose income is to any extent assessable.

The exempt entity earned fees from the use of its assets that were not assessable for income tax purposes. Its assets are improvements to land and fixtures on land that fall within the definition of depreciating asset as set out in subsection 40-30(3) of the ITAA 1997. The taxpayer, whose business relates to the leasing of a certain class of fixtures and improvements to land, commenced management of the exempt entity's depreciating assets under a long term lease and related agreements. Subsequent to the execution of the lease and pursuant to item 2 of the table in section 40-40 of the ITAA 1997, the taxpayer became the holder of the depreciating assets. The taxpayer's income is assessable.

All legislative references in this Interpretative Decision are to the ITAA 1997

Division 58 sets out special rules that apply in calculating deductions for the decline in value of a depreciating asset under Subdivision 40-B.

Division 58 applies in two defined situations: • an entity sale situation, and • an asset sale situation.

Subsection 58-5(4) defines an asset sale situation. The definition is satisfied where an entity whose income is assessable acquires a depreciating asset from the Commonwealth, a State, a Territory or an exempt entity (paragraph 58-5(4)(a)) and the asset is acquired in connection with the acquisition of a business from the Commonwealth, State, Territory or exempt entity (paragraph 58-5(4)(b)).

The asset sale situation requires the identification of an acquisition. 'Acquire' is not defined in Division 58 and takes its ordinary meaning, shaped by the context in which it appears. The meaning given in the Macquarie Dictionary , 2001, rev. 3 rd edn, The Macquarie Library Pty Ltd, NSW of 'acquire' is 'to come into possession of; get as one's own'. In the context of obtaining a deduction for decline in value under Division 40, it is unclear whether the word 'acquire' requires the taxpayer to become a specific type of holder (for example, an owner under item 10 of the table in section 40-40) or a holder under any item in the table in section 40-40.

Section 15AA of the Acts Interpretation Act 1901 provides: In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.

The essential purpose of Division 58 is to modify the rules under which a depreciating asset of the Commonwealth, a State, a Territory or an exempt entity is brought into the tax system for the purposes of calculating a deduction for its decline in value.

Division 58 sought to provide consistency in the application of entity sale and asset sale situations. Paragraph 3.10 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.2) 1999, to the extent that is relevant here, explains this policy: The proposed measures ensure that where depreciable assets of an exempt entity enter the tax net and that transfer is in connection with the acquisition of a business, the purchaser should obtain the same opening value for depreciation purposes irrespective of whether the transition of the assets into the tax net occurs by way of entity sale or asset sale.

Upon the introduction of Division 40, a new Division 58 was introduced. The general outline of the Explanatory Memorandum to the New Business Tax System (Capital Allowances - Transitional and Consequential) Bill 2001 which inserted new Division 58 stated that existing regimes using different terms and concepts required amendments to ensure that assets subject to the current law moved smoothly into the uniform capital allowance system. There was no change either implicitly or explicitly in the underlying policy of Division 58 and the new Division 58 was drafted to interact with Division 40 in the same way it had interacted with former Division 42.

Thus one would be led to expect that 'acquiring a depreciating asset' under Division 58 would have effect for the purposes of covering the intended range of scenarios under the holding rules in section 40-40. It follows then that Division 58 applies to depreciating assets which start to be held under any item in the table in section 40-40 which brings the asset into the tax system.

This view is supported by the clear policy objective that Division 58 be applied consistently irrespective of whether the transition occurs by way of entity sale or asset sale. An approach to interpretation of Division 58 that applies the holding rules in section 40-40 inconsistently between the entity sale situation and the asset sale situation would defeat this underlying policy.

Under an entity sale situation, Division 58 affects the way Division 40 applies to depreciating assets held by an entity (under any item in the table in section 40-40) upon it becoming taxable on its income. Therefore, a requirement in the application of an asset sale situation for holding by a taxpayer under one specific item in the table in section 40-40 (for example, item 10) is not a preferred interpretation. It would be inconsistent with the clear policy objective of Division 58.

The Commissioner considers that the requirement in subsection 58-5(4) for the purchaser to acquire the depreciating asset from the Commonwealth, a State, a Territory or an exempt entity should be interpreted as satisfied where a depreciating asset of an exempt entity starts to be held by a taxable entity. This interpretation is consistent with the entity sale requirement in subsection 58-5(2) which is satisfied where the income of the exempt entity which holds the asset becomes, to any extent, assessable.

This view is supported by paragraph 4.40 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 2002 which introduced consequential amendments to the Division and which (to the extent it is relevant here) states: Division 58 sets out special rules that apply in calculating deductions for the decline in value of depreciating assets and balancing adjustments for assets which were held by an exempt entity and are subsequently held by a taxable entity.

In this case, despite not becoming the legal owner of the depreciating asset the taxpayer starts to hold the depreciating asset under section 40-40 when it becomes a lessee with a right to remove the asset. Immediately before the taxpayer became the asset's holder, the depreciating asset was held by an exempt entity. In these circumstances the taxpayer has acquired a depreciating asset from the Commonwealth, a State, a Territory or an exempt entity as required in paragraph 58-5(4)(a).

Date of Amendment Part Comment 7 November 2014 Reason for Decision Update quotation from section 15AA of the Acts Interpretation Act 1901

Date of Amendment | Part | Comment

7 November 2014 | Reason for Decision | Update quotation from section 15AA of the Acts Interpretation Act 1901