Disposing of a depreciating asset
When you dispose of a depreciating asset (that is, if you sell it or it's lost or destroyed), you may need to make a balancing adjustment to work out the amount to include in your assessable income or the amount to claim as a deduction.
However, if an asset is used partly for a non-taxable purpose (for example, used privately), a part of the balancing adjustment amount may be treated as a capital gain or loss.
If the depreciating asset was in a low-value pool, a balancing adjustment is not normally required. The proceeds from the sale are instead used to reduce the value of the pool, which in turn reduces future depreciation deductions.
If you dispose of a depreciating asset which is not a pooled asset or capital works, you need to compare its termination value (for example, the sale proceeds) with its adjustable value (the cost of the asset less depreciation deductions).
You calculate the balancing adjustment as follows:
- If the asset’s termination value is more than its adjustable value, the difference is included in your assessable income.
- If the asset’s termination value is less than its adjustable value, you are entitled to a deduction for the difference.
If you've used the asset partly for non-taxable purposes – for example, if you are a sole trader using a car privately – you need to work out the percentage of non-taxable use over the period that you used the asset. The balancing adjustment amount is then reduced by that percentage.
You also need to work out the difference between the asset’s cost and its termination value. For some depreciating assets (excluding cars), the proportion of this amount that is attributable to the asset’s non-taxable use might be a capital gain or loss.
Replacing an asset
Replacing an asset will generally not affect the calculations set out above (that is, generally, a balancing adjustment offset is not available). However, if you dispose of the asset involuntarily – for example, if it was destroyed by fire or had to be replaced because of a compulsory mining lease granted over the property – you may be able to offset the assessable balancing adjustment amount against the cost of a replacement asset.
Low-value pool assets
When you dispose of depreciating assets from a low-value pool, there is not normally a balancing adjustment (except when the pool balance has been reduced to zero).
Rather, the proceeds from the disposal are used to reduce the value of the pool. As a result, there is a reduced amount of pool depreciation claimed in the following years.
Buildings and other capital works
Deductions for certain depreciating assets, such as buildings and structural improvements, are dealt with separately under the capital works provisions.
When you dispose of a depreciating asset, you may need to make a balancing adjustment to work out the amount to include in your assessable income or to claim as a deduction. If the depreciating asset was in a low-value pool, no balancing adjustment is normally required. The proceeds from the sale are instead used to reduce the value of the pool.