Depreciation term dictates reinvestment reserve write-off
Business owners who purchase an operating asset for a price in excess of the asset’s book value have the option of deferring the surplus proceeds over and above the book value by creating a reinvestment reserve on condition, that is, that the business owner should actually have the intention of proceeding with reinvestment. The mechanism involves the write-down or write-off, as the case may be, of the reinvestment reserve from the purchase price(s) of the operating asset(s) acquired.
The write-down or write-off of a reinvestment reserve associated with operating assets that tend not to be subject to depreciation or whose depreciation term(s) exceed(s) ten years is permissible only where the reserve in question is created on the occasion of operating assets having a similar economic function within the business being divested.
A general partnership posted the book profit it had achieved on the sale of its milk quota to a reinvestment reserve, which it went on to write off against the purchase price of the solar panel system it subsequently acquired. The Tax and Customs Administration ordered the adjustment of the write-down of the reinvestment reserve. The matter ended up before the District Court, which inquired inter alia into the length of the solar panel system’s depreciation term as this was relevant in determining whether it had been appropriate to offset the reinvestment reserve with the purchase price.
The Court decided that the solar panel system’s depreciation term had to be greater than ten years. No allowances are made in calculating an asset’s economic life for the warranty term or the resource recovery term. It is not the social custom to issue warranties on operating assets for the latter’s entire life, added to which operating assets on expiry of their resource recovery term tend to still be economically viable, with the Court additionally noting that recent technological developments in the solar panel field had not warranted the assumption that an existing solar panel system’s economic life should be capped at ten years. It followed that the general partnership had been wrong to write down its reinvestment reserve against the purchase price of its solar panel system.
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