A fixed asset that has a permanently lower value may be written down to its net realisable value and charged to profit. Where a grant is received in connection with this change in value, the loss arising from the write-down is offset against the grant.
Agricultural land
A man runs a dairy farm as a partnership with his wife and son. Each partner holds a one-third share in the partnership. The husband and wife contribute the right to use and enjoy the land to the partnership. They each hold a 50% share.
The land is being converted from agricultural land to a nature reserve. In connection with this, the interested parties receive a grant under the Nature and Landscape Quality Boost Subsidy Scheme. They allocate this grant to the partnership. The husband, wife and son each include one-third of the grant received as part of their profits in their income tax returns. For this profit, they claim the exemption under Article 3.13(1)(g) of the Income Tax Act 2001.
Write down
The conversion to a nature reserve reduces the value of the agricultural land. This reduction in value is permanent. The husband and wife therefore write down the value of the land to its business value. They charge the write-down loss (50% each) to their business profits.
The Arnhem-Leeuwarden Court of Appeal agrees with the write-down of the land to its fair value. However, the Court deduces from the terms of the grant that the grant is awarded as compensation for the fall in value. The fall in value and the grant are therefore so closely linked that they must be offset against each other for the purposes of calculating profit. Consequently, on balance, there is no impairment loss.
The Court also ruled that the allocation of the grant received to the partnership is not commercially sound, as the land to which the grant relates forms part of the husband and wife’s assets outside the partnership.