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  • What happens if you no longer hold or use a depreciating asset?

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Under the UCA rules, if you cease to hold or to use a depreciating asset, a balancing adjustment event may occur. If there is a balancing adjustment event, you need to calculate a balancing adjustment amount to include in your assessable income or to claim as a deduction.

    A balancing adjustment event occurs for a depreciating asset when:

    • you stop holding it – for example, if the asset is sold, lost or destroyed
    • you stop using it and expect never to use it again
    • you stop having it installed ready for use and you expect never to install it ready for use again
    • you have not used it and decide never to use it or
    • a change occurs in the holding or interests in an asset which was or is to become a partnership asset.

    A balancing adjustment event does not occur just because a depreciating asset is split or merged, see Split or merged depreciating assets. However, a balancing adjustment event does occur if you stop holding part of an asset.

    The balancing adjustment amount is worked out by comparing the asset's termination value and its adjustable value at the time of the balancing adjustment event. If the termination value is greater than the adjustable value, the excess is included in your assessable income. If the termination value is less than the adjustable value, you can deduct the difference.

    Example: Working out an assessable balancing adjustment amount (ignoring any GST impact)

    Bridget purchased a cabinet for $2,000 on 1 July 2000. She used the cabinet from that date wholly for a taxable purpose. The cabinet was sold on 30 June 2002 for $1,300. Its adjustable value at that time was $1,200.

    As the termination value of $1,300 is greater than the adjustable value of the cabinet at the time of its sale, the difference of $100 is included in Bridget's assessable income.

    End of example

     

    Example: Working out a deductible balancing adjustment amount (ignoring any GST impact)

    If Bridget sells the cabinet for $1,000, the termination value is less than the adjustable value of the cabinet at the time of its sale ($1,200). Bridget can deduct the balancing adjustment amount of $200.

    End of example

    There are situations where these general balancing adjustment rules do not apply:

    • If a depreciating asset has been used for a non-taxable purpose, the balancing adjustment amount is reduced to reflect that non-taxable use. Additionally, a capital gain or capital loss can arise to the extent of the non-taxable use – see Depreciating asset used for non-taxable purpose.
    • Similarly, if the depreciating asset is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced, the balancing adjustment amount is reduced and a capital gain or capital loss can arise – see Leisure facilities and boats.
    • There are special balancing adjustment rules for cars – see Balancing adjustment rules for cars.
    • A balancing adjustment event for a depreciating asset in a low-value or common-rate pool or for which expenditure has been allocated to a software development pool is dealt with under specific rules for those pools – see Balancing adjustment event for a depreciating asset in a low-value pool, Common-rate pools and Software development pools.
    • If the disposal of a depreciating asset is involuntary, you can offset an assessable balancing adjustment amount – see Involuntary disposal of a depreciating asset.
    • Roll-over relief may apply to the disposal of a depreciating asset in certain circumstances, such as where an asset is transferred between spouses pursuant to a court order following a marriage breakdown – see Roll-over relief.
    • There are special balancing adjustment rules for depreciating assets used in carrying on research and development activities – see the Research and development tax concession schedule and instructions for more information.

    Termination value

    The termination value is, generally, what you receive for the asset when a balancing adjustment event occurs. It is made up of amounts received and the market value of non-cash benefits (such as goods or services) you have received for the asset.

    The most common example of termination value is the proceeds from selling an asset. The termination value may also be an insurance pay-out for the loss or destruction of a depreciating asset.

    Apart from what is actually received, termination value can be what is taken to have been received under the legislation. For example, if you dispose of a depreciating asset for less than market value and do not deal at arm's length with the other parties to the transaction, or you stop holding an asset under a private or domestic arrangement (for instance, you give an asset to a family member), the termination value of the asset is its market value just before you stopped holding it.

    The termination value of a unit of in-house software you still hold but stop using and expect never to use again or decide never to use is zero, see Units of in-house software.

    The termination value is different for any other asset. If you stop using the asset and expect never to use it again but still hold it, the termination value is the market value when you stop using it. For a depreciating asset you decide never to use but still hold, the termination value is the market value when you make the decision.

    If you die and a depreciating asset starts to be held by your legal personal representative (the executor or administrator of your estate), a balancing adjustment event occurs. The termination value of the asset is its adjustable value at the date of death. If the asset passes directly to a beneficiary of the estate or to a surviving joint tenant, the termination value is the market value just before you die.

    The termination value is reduced by the GST payable if the balancing adjustment event is a taxable supply. It can be modified by increasing or decreasing adjustments. If the termination value is taken to be the market value of the asset, the market value is reduced to exclude the GST payable if the balancing adjustment event is a taxable supply.

    If you receive a payment for several items that include a depreciating asset, you need to apportion the payment between the termination value of the depreciating asset and the other items.

    In most cases, the termination value can be reduced by any expenses of the balancing adjustment event-for example, advertising or commission expenses. The expenses must not be otherwise deductible.

    Depreciating asset used for non-taxable purpose

    If a depreciating asset is used for both taxable and non-taxable purposes, the balancing adjustment amount must be reduced by the amount that is attributable to the non-taxable use. In addition, a capital gain or capital loss may arise under the capital gain and capital loss provisions in respect of the difference between the asset's cost and its termination value that is attributable to the non-taxable use.

    For depreciating assets that are used wholly for non-taxable purposes, the balancing adjustment amount is reduced to zero. The difference between the asset's termination value and its cost can be a capital gain or capital loss.

    For some depreciating assets, any capital gain or capital loss arising will be disregarded even though the asset is used for non-taxable purposes. These assets include:

    • assets acquired before 20 September 1985
    • cars that are designed to carry a load of less than one tonne and less than 9 passengers
    • motor cycles
    • valour or brave conduct decorations awarded
    • a collectable (such as a painting or an antique) if the first element of its cost is $500 or less
    • assets for which you can deduct an amount for the decline in value under the STS rules for the income year in which the balancing adjustment event occurred
    • assets used to produce exempt income.

    In addition, a capital gain arising from the disposal of a personal use asset (an asset used or kept mainly for personal use or enjoyment) of which the first element of cost is $10 000 or less and a capital loss arising from the disposal of any personal use asset are disregarded for capital gains tax purposes.

    Example: Sale of a depreciating asset used partly for a taxable purpose (ignoring any GST impact)

    Andrew sells a computer for $600. The computer's cost is $1,000. It has been used 40 per cent for private purposes. At the time of its sale, the computer's adjustable value is $700.

    Andrew can claim a deduction for the balancing adjustment amount of $60. This is 60 per cent (the proportion of use for a taxable purpose) of the balancing adjustment amount (the difference between the computer's termination value and its adjustable value at the time of its sale).

    In addition, a capital loss of $160 arises. This is 40 per cent (the proportion of use for a non-taxable purpose) of the difference between the computer's termination value and its cost.

    End of example

    Leisure facilities and boats

    If a balancing adjustment event occurs to a depreciating asset that is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced, see Decline in value of leisure facilities and boats the balancing adjustment amount is reduced to the extent the deductions for decline in value were reduced. In addition, a capital gain or capital loss may arise in respect of the difference between the asset's cost and its termination value that is attributable to the reduction. These rules are similar to those for working out the balancing adjustment amount for a depreciating asset used for a non-taxable purpose.

    Plant acquired before 11.45am on 21 September 1999 and other depreciating assets acquired before 1 July 2001

    If a balancing adjustment event occurs to an item of plant that was acquired before 11.45 am (by legal time in the ACT) on 21 September 1999 or any other depreciating asset acquired before 1 July 2001, any assessable balancing adjustment amount or capital gain (if the plant was used for non-taxable purposes) can be reduced to take account of the amount by which the capital gains tax cost base of the asset exceeds its cost. One reason that the cost base might exceed the cost is indexation of the cost base.

    The purpose of this reduction is to preserve cost base advantages for assets acquired before the dates mentioned (for example, indexation benefits).

    The reduction is worked out having regard to the capital gains tax concepts of cost base and indexation.

    See the Guide to capital gains tax for more information about indexation of a cost base and the impact of indexation on discount capital gains.

    Balancing adjustment rules for cars

    If a balancing adjustment event occurs for your car, you need to work out any balancing adjustment amount. Special rules apply to the calculation of balancing adjustment amounts for cars.

    If a balancing adjustment event occurs for a car used for non-taxable purposes (even if it is used or kept mainly for personal use and enjoyment), any capital gain or capital loss is disregarded.

    If you use the 'one-third of actual expenses' or the 'log book' method of claiming car expenses, your balancing adjustment amount needs to be reduced by the amount that is attributable to the use of the car for non-taxable purposes.

    Example: If you use the 'one-third of actual expenses' method (ignoring any GST impact)

    Louise acquired a car on 1 July 1999 for $26,000. During both the 2000-01 and 2001-02 income years, Louise used the 'one-third of actual expenses' method to work out her deductions for car expenses. She sold her car for $24,500 on 30 June 2002. At that time, the adjustable value of the car was $18,200.

    Louise's balancing adjustment amount is reduced by the amount attributable to her use of the car for a non-taxable purpose. As she uses the 'one-third of actual expenses' method, her balancing adjustment amount is reduced by 2/3. Louise's balancing adjustment is $2,100; that is, one-third of the difference between the termination value and the adjustable value of the car. Louise must include the amount of $2,100 in her assessable income.

    End of example

     

    Example: If you use the 'log book' method (ignoring any GST impact)

    If Louise uses the 'log book' method to work out her deductions for car expenses and her log book shows that the level of her business use is 40 per cent, her balancing adjustment amount is $2,520. This is 40 per cent of the difference between the termination value and the adjustable value of the car. Louise must include the amount of $2,520 in her assessable income.

    End of example

    If you have used the 'cents per kilometre' method or the '12 per cent of original value' method of claiming car expenses, no balancing adjustment amount arises because the decline in value of the car is not worked out separately under those methods: rather, it is taken into account as part of the calculation of the car expenses. However, if you switch between these methods and the 'one-third of actual expenses' or 'log book' methods of claiming car expenses, you may have to work out a balancing adjustment amount. This is only expected to occur in a limited number of cases. If you are affected and you are unsure of how to work out your balancing adjustment amount, contact your professional adviser or the ATO.

    For a car subject to the car limit described at Car limit for certain motor vehicles, the termination value is reduced to an amount determined by the following formula:

    (car limit + amounts included in the second element of cost of the car) ÷ total cost of the car (ignoring the car limit)

    If a car was acquired at a discount and the cost of the car was increased by a discount portion, see Car acquired at a discount the termination value of that car must also be increased by that discount portion. This will impact on the balancing adjustment amount.

    If a lessee under a luxury car lease or a hirer under a hire purchase agreement does not actually acquire the car, they are treated as disposing of the asset to the lessor or financier, respectively. This constitutes a balancing adjustment event and any balancing adjustment amount needs to be worked out.

    Involuntary disposal of a depreciating asset

    An involuntary disposal occurs if a depreciating asset is:

    • lost or destroyed
    • compulsorily acquired by an Australian government agency or
    • disposed of to an Australian government agency after compulsory negotiations

    after compulsory negotiations after 11.45 am (by legal time in the ACT) on 21 September 1999.

    You may offset an assessable balancing adjustment amount arising from an involuntary disposal against the cost or the opening adjustable value plus second element costs of one or more replacement assets. You must incur the expenditure on the replacement asset, or start to hold it, no earlier than one year before the involuntary disposal and no later than one year after the end of the income year in which the disposal occurred. The Commissioner can agree to extend the time limit.

    To offset the assessable balancing adjustment amount, the replacement asset must be wholly used for a taxable purpose and you must be able to deduct an amount for it.

    Roll-over relief

    If roll-over relief is available under the UCA rules, no balancing adjustment amount arises on the balancing adjustment event that happens when a change occurs in the holding of or in the interests in a depreciating asset.

    In some cases, roll-over relief is automatic-transfers pursuant to a court order following a marriage breakdown and transfers to a wholly-owned company or to another member of a wholly-owned group.

    In some cases, roll-over relief must be chosen-if the event arises from a variation in the constitution of a partnership or in a partnership interest. The transferor and the transferee must jointly choose the roll-over relief.

    When roll-over relief applies, the transferee of the depreciating asset can claim deductions for the asset's decline in value as if there had been no change in holding.

    If the transferor used the prime cost method to work out decline in value, the transferee should use the same method and must use the adjusted prime cost formula, see Methods of working out decline in value.

    There are specific record keeping requirements for roll-over relief, see Roll-over relief.

    Limited recourse debt arrangements

    If a depreciating asset is acquired under a limited recourse debt arrangement (including a hire purchase agreement or instalment sale) which terminates after 27 February 1998 and part of the debt principal remains unpaid because of the limited recourse, an adjustment to assessable income may be required. To the extent that the capital allowance deductions exceed the actual amount outlaid under the arrangement, an amount is included in assessable income.

    If you are not sure how to work out your adjustment to assessable income, contact your tax adviser or the ATO.

    Split or merged depreciating assets

    If a depreciating asset you hold is split into 2 or more assets, or if a depreciating asset or assets you hold is or are merged into another depreciating asset, you are taken to have stopped holding the original depreciating asset(s) and to have started holding the split or merged asset(s). However, a balancing adjustment event does not occur just because depreciating assets are split or merged.

    An example of splitting a depreciating asset is the removal of a CB radio from a truck and its installation in a residence.

    After depreciating assets are split or merged, each new asset must satisfy the definition of a depreciating asset if the UCA rules are to apply to it. For each depreciating asset you have started to hold, you need to establish the effective life and cost.

    The first element of cost for each of the split or merged depreciating assets is a reasonable proportion of the adjustable values of the original asset(s) just before the split or merger and the same proportion of any costs of the split or merger.

    If a balancing adjustment event occurs to merged or split depreciating asset (s)-for example, on sale-the balancing adjustment amount is reduced:

    • to the extent the asset has been used for a non-taxable purpose
    • by any amount that is reasonably attributable to use for a non-taxable purpose of the original depreciating asset(s) before the split or merger.

    This reduction is not required if the depreciating asset is mining, quarrying or prospecting information.

    Last modified: 11 Dec 2019QC 27399