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 a depreciating asset.
Expenses of a balancing adjustment event (such as advertising or commission expenses) may be included in the second element of the cost of the depreciating asset - see The cost of a depreciating asset.
You work out the balancing adjustment amount by comparing the asset's termination value (such as the proceeds from the sale of an asset) and its adjustable value at the time of the balancing adjustment event. See Termination value for information about how to work out an asset's termination value.
If the termination value is greater than the adjustable value, you include the excess 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 which she held for two years and used wholly for a taxable purpose. She then sold the cabinet for $1,300. Its adjustable value at the 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 as an assessable balancing adjustment amount.
End of example
Example: Working out a deductible balancing adjustment amount - ignoring any GST impact
If Bridget sold the cabinet for $1,000, the termination value would be less than the adjustable value of the cabinet at the time of its sale ($1,200). The difference of $200 is a deductible balancing adjustment amount.
End of exampleThere are situations where these general balancing adjustment rules do not apply:
- If a depreciating asset has been partly used for other than a taxable purpose, the balancing adjustment amount is reduced to reflect only the taxable use. Additionally, a capital gain or capital loss can arise to the extent that the depreciating asset was used for other than a taxable purpose - see Depreciating asset used for other than a 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 may be able to offset an assessable balancing adjustment amount - see Involuntary disposal of a depreciating asset.
- Rollover 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 Rollover relief.
- There are no specific balancing adjustment rules for some primary production depreciating assets - see Primary production depreciating assets - or certain depreciating assets used for landcare operations, electricity connections or telephone lines - see Landcare operations and Electricity connections and telephone lines. However, such assets may be considered part of land for capital gains tax purposes.
- 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 instructions 2006 for more information.
A GST liability will generally occur when a depreciating asset is disposed of by a GST registered entity - see the fact sheet GST and the disposal of capital assets (NAT 7682-11.2004) available on our website, for more information.