Start the clock.
That is not what someone is generally thinking when they have an asset stolen, lost or destroyed. When it comes to the assets that are subject to the Division 40 capital allowance regime, i.e. a depreciable asset, timing is quite important.
Where a depreciable item, say, plant and equipment, is lost, destroyed in a fire or in any other manner, or has been stolen, the owner may receive an insurance payout in relation to that asset. Where the insurance payout is greater than its written down value, there would be an amount of assessable income included in the owner’s tax return.
Losing a portion of the insurance payout to tax may seem like an inequitable tax outcome where those insurance proceeds are used to purchase a replacement asset. To alleviate this outcome, the asset owner can choose to utilise the Involuntary Disposals provision.
“Involuntary disposals” cover the loss of assets described above as well as assets that have been compulsory acquired in certain circumstances.
Where a replacement asset has been acquired, asset owners can choose to exclude the assessable income from the involuntary disposal, and instead reduce the cost base of the replacement asset by that amount. The effect of this choice is that assessable income is reduced in the current year, and there would be lower depreciation deductions over the life of the replacement asset.
So why did we start the clock?
The ability to choose to exclude the assessable income only exists if the replacement asset is held by the end of the income year after the original asset was lost or destroyed. The asset then needs to be installed ready for use wholly for business purposes.
The requirement to have a replacement asset ready for use by the end of the following income year may not be a concern for off the shelf assets or those that do not require customisation. But what of large assets that may take significant amounts of time to construct, customise, import or install?
If the original asset was lost or destroyed on 29 June of one year, will the replacement asset be ready by 30 June of the following year?
In this case the involuntary disposals provision may still be available, however a request must be made to the Commissioner of Taxation to allow for a longer period of time to begin to hold the replacement asset.
The Commissioner is more likely to allow for a longer time period where the asset is so large that it would take longer than 12 months to construct or be delivered and installed, or where there are delays in receiving the insurance proceeds. Delays that are caused by the asset owner will weigh against the owner.
So, when and asset is lost, consider when its replacement is likely to be ready. If the Commissioner is going to be required to rule on the involuntary disposals provisions, then consider the timing of making the request as it may take many months for the Commissioner to finalise his decision.
If you have any questions on the involuntary disposals provisions, please contact Ross Prosper.