Depreciating assets previously held by an exempt entity: reasonable attribution of pre-existing audited book value

For the purposes of determining the pre-existing audited book value of each privatised asset, has there been a reasonable attribution of the total book value specified in the balance sheet of the exempt entity to each privatised asset for the purposes of subsection 58-85(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. For the purposes of determining the pre-existing audited book value of each privatised asset, there has been a reasonable attribution of the total audited book value specified in the balance sheet of the exempt entity to each privatised asset for the purposes of subsection 58-85(2) of the ITAA 1997 as the taxpayer has used an attribution method and process that gives a reasonable attribution to each privatised asset.

The taxpayer (the purchaser) acquired depreciating assets including rail transport trackwork from an exempt entity. Each depreciating asset became a privatised asset under paragraph 58-5(5)(d) of the ITAA 1997 once acquired by the purchaser. The purchaser chose, under section 58-65 of the ITAA 1997, to use the undeducted pre-existing audited book value (UPABV) to work out the first element of cost of each privatised asset that was included in the audited accounts of the exempt entity at 30 June 1996.

The balance sheet of the exempt entity at the balance date did not specify a value for each separate privatised asset but specified a total value for two or more assets including the privatised assets. The accounts of the exempt entity showed values for the asset group 'trackwork and infrastructure' which, in effect, aggregated values for general preparatory earthwork assets and each privatised asset (rail transport trackwork).

In order to determine a pre-existing audited book value (PABV) for each privatised asset, the purchaser engaged experts to reconstruct the cost of earthwork for each rail transport trackwork depreciating asset. Consistent with established industry practice, the experts undertook a highly sophisticated analysis of the total reconstructed cost of the earthworks to establish the cost of general preparatory earthworks which are not part of the privatised rail transport trackwork assets. Taking into account the relative cost of general preparatory earthworks and based on differentiated track and terrain, the experts established the proportion of the construction cost of each trackwork segment that related to the rail transport trackwork privatised assets.

A weighted average proportion was then applied to the overall book value in the balance date audited accounts for the asset group that included rail transport trackwork to determine how much of the total value specified for the asset group was attributable to each privatised asset.

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. An 'asset sale situation' occurs where a taxable entity acquired a business from the Commonwealth, a State, a Territory or an exempt entity and also acquires a depreciating asset in connection with the acquisition of the business. In an asset sale situation, a depreciating asset the purchaser acquires from the Commonwealth, a State, a Territory or an exempt entity is a privatised asset. Under section 58-65 a taxpayer that is the purchaser of a privatised asset can choose to use the UPABV of a privatised asset as the basis of its deductions for the decline in value of the asset under Division 40.

Under section 58-85 the PABV is taken to be the specified value shown for the asset in the balance sheet, at the balance date, of an exempt entity where the conditions in paragraphs 58-85(1)(a) to 58-85(1)(c) are satisfied. Subsection 58-85(2) allows a PABV to be attributed in circumstances where a balance sheet did not specify an audited book value for a privatised asset but specified a total value for two or more assets that include the privatised asset. In that situation, so much of the total value as is reasonably attributable to the privatised asset is taken to be its PABV.

In this case, the method and process the taxpayer used to attribute a portion of the total audited book value specified in the balance sheet for numerous assets to each rail transport trackwork privatised asset is accepted as a 'reasonable attribution' of that total value for the purpose of subsection 58-85(2) because: • relevant market valuations are not available for each of the assets (including the privatised assets) included in the balance date total audited book value for the asset group 'trackwork and infrastructure' • expert data analysis and engineering techniques were utilised in order to estimate how much of the construction cost of 'trackwork and infrastructure' would have been paid for each privatised asset • the approach and process used is consistent with established industry practice, and • it is reasonable for the purchaser to attribute a portion of the total audited book value specified for 'trackwork and infrastructure' to each rail transport trackwork privatised asset based on the relative portion of total construction cost of 'trackwork and infrastructure' that the exempt entity would have been paid for each privatised asset.

Date of Amendment Part Comment 22 September 2017 Facts Minor grammatical amendment. Related ATO Interpretative Decisions Removed reference to ATO ID 2003/489 which has been withdrawn. 22 February 2007 Reason for Decision Minor grammatical amendment. 7 November 2014 Facts Minor grammatical amendment.

Date of Amendment | Part | Comment

22 September 2017 | Facts | Minor grammatical amendment.

Related ATO Interpretative Decisions | Removed reference to ATO ID 2003/489 which has been withdrawn.

22 February 2007 | Reason for Decision | Minor grammatical amendment.

7 November 2014 | Facts | Minor grammatical amendment.