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  • Uniform capital allowance system – Disposal of a depreciating asset

    The uniform capital allowance (UCA) system applies from 1 July 2001. Under UCA rules, taxpayers calculate deductions for the decline in value of a depreciating asset based on how it's used for a taxable purpose, for example, to produce assessable income.

    When you cease to hold, or to use a depreciating asset you must calculate a balancing adjustment. You need to work out this amount to include in your assessable income, or to claim it as a deduction. If the depreciating asset has been used partly for a non-taxable purpose, the balancing adjustment amount is reduced to reflect only the taxable purpose proportion of the asset's use. A capital gain or capital loss can arise at the time of the balancing adjustment. This is only to the extent the asset has been used for a non-taxable purpose.

    The following information will help you with the disposal of a depreciating asset. This is particularly dealing with sales, the most common type of balancing adjustments. However these principles apply equally to all types of balancing adjustment events.

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    Instant asset write-off

    You can claim an immediate deduction for most depreciating assets, depending on:

    • the cost of the asset
    • when the asset is first used or installed ready for use
    • your business's aggregated turnover.

    This is referred to as instant asset write-off.

    If businesses can't immediately claim a deduction for individual assets, they can continue to deduct these over time using the small business pool or general depreciation rules (depending on their turnover).

    You can use the simplified depreciation rules if you are a small business entity (2007–08 and later years).

    You must use the simplified depreciation rules for income years where you were in the simplified tax system (2006–07 and earlier years).

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    Backing business investment – accelerated depreciation

    From 12 March 2020 until 30 June 2021 the backing business investment measure provides a time-limited (15-month) investment incentive to support business investment and economic growth by accelerating depreciation deductions. The key features of the incentive are as follows:

    • The benefits are either
      • Deduction of 50% of the cost or opening adjustable value of an eligible asset on installation. Existing depreciation rules apply to the balance of the asset’s cost.
      • If you are using the simplified depreciation rules for small business you can claim 57.5% of the cost of the asset in the first year you add the asset to the small business pool.
       
    • Eligible businesses — businesses with aggregated turnover below $500 million.
    • Eligible assets — new depreciating assets (for example, plant, equipment and specified intangible assets, such as patents). The assets must be first held, and first used or first installed ready for use for a taxable purpose on or after 12 March 2020 until 30 June 2021. Some exclusions apply.

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    How to account for the disposal of a depreciating asset

    The disposal of a depreciating asset is a balancing adjustment event. You must compare the asset's termination value, with its adjustable value at that time. If the two figures are different, the difference is the balancing adjustment amount.

    Generally, the termination value is the amount you receive for the asset on its disposal. It also includes the market value of any non-cash benefits such as goods or services you receive for the asset. The termination value is reduced to exclude GST payable if the disposal is a taxable supply.

    A depreciating asset's adjustable value at a particular time is generally its cost less its decline in value up to that time.

    The balancing adjustment amount is applied if the termination value of a depreciating asset:

    • is more than its adjustable value, the difference is included in your assessable income
    • is less than its adjustable value, the difference is an allowable deduction.

    The balancing adjustment amount is applied in the year the balancing adjustment event occurs.

    Special balancing adjustment calculations apply to luxury cars and to cars where different methods have been used to substantiate car expense deductions.

    Sale of a depreciating asset used wholly for a taxable purpose

    If the depreciating asset is used wholly for a taxable purpose, the full balancing adjustment amount is applied. No capital gain or capital loss arises.

    Example – sale used wholly for a taxable purpose

    John operates a small printing business and decides to sell an old photocopier for $2,750. Assuming the sale is a taxable supply, the termination value is reduced by the $250 GST payable. This means that the reduced termination value of the photocopier is $2,500 ($2,750 less $250).

    If at the time of sale the adjustable value of the photocopier is $2,000, John must include $500 in his assessable income ($2,500 less $2,000).

    If at the time of sale the adjustable value of the photocopier is $2,700, John would claim a deduction of $200 ($2,700 less $2,500).

    End of example

    Sale of a depreciating asset used only partly for a taxable purpose

    If a depreciating asset is used only partly for a taxable purpose, you reduce the balancing adjustment amount to reflect that non-taxable use. The reduced balancing adjustment amount is included in, or deducted from, your assessable income under the UCA provisions.

    The non-taxable purpose proportion of the difference between the asset's termination value and its cost can constitute a capital gain or a capital loss under the capital gains provisions.

    Example – sale used partly for taxable purpose

    John also sells a computer. The termination value of the computer is $600 and its cost is $1,000. The computer has been used 40% for private purposes. At the time of sale, the computer's adjustable value is $700. John can claim a $60 deduction for the reduced balancing adjustment amount (60%, the taxable purpose proportion, of $700 less $600). A capital loss of $160 also arises (40%, the non-taxable purpose proportion, of $1,000 less $600).

    End of example

    Sale of a depreciating asset used wholly for a non-taxable purpose

    If a depreciating asset is used wholly for a non-taxable purpose, the balancing adjustment amount is reduced to nil.

    The difference between the asset's termination value and its cost can constitute a capital gain or a capital loss under the capital gains provisions.

    How to account for the costs of selling a depreciating asset

    Generally, you reduce the termination value of a depreciating asset by any costs of disposal, such as advertising costs. You can only reduce the termination value if the costs are not deductible.

    Offsetting a balancing adjustment amount against a replacement depreciating asset

    If the disposal of the asset was involuntary, you can offset the balancing adjustment amount that would otherwise be included in your assessable income against the cost of a new replacement asset (or against the adjustable value of an asset already held). An involuntary disposal of a depreciating asset occurs if an asset you own is:

    • lost or destroyed
    • compulsorily acquired by an entity (other than a foreign government agency)
    • disposed of to an entity (other than a foreign government agency) after they serve a notice on you inviting you to negotiate a sale agreement. They must have informed you that, if the negotiations are unsuccessful, the asset will be compulsorily acquired
    • land or an asset affixed to land which is disposed of to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land (or would have been compulsorily granted over the land), the lease significantly affected (or would have significantly affected) your use of the land and the entity to which you disposed of the land is the lessee.

    For the offset to be available, the replacement asset must be used wholly for a taxable purpose. It must have been acquired in the period starting a year before the disposal and ending a year after the income year in which the disposal happened. The Commissioner of Taxation can agree to extend this time limit.

    The rules in relation to compulsory acquisition of assets were amended on 22 June 2006 to extend to cover compulsory acquisitions by private acquirers.

    These amendments apply to events that happen after 1.00pm (by legal time in the ACT), 11 November 1999 and include a provision that allows more time for taxpayers to obtain an amended assessment to benefit from the rules.

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      Last modified: 07 Apr 2020QC 16294