• Balancing adjustment rules for cars

    Attention

    Warning:

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

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    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.

    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.

    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.

    Last modified: 01 Jun 2005QC 27399