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

If you cease to hold or 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
• 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 in the next column 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 that 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.

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.

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

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) for more information.

## Termination value

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

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

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 (for example, in the case of assets disposed of under a private or domestic arrangement), the market value is reduced by any input tax credit to which you would be entitled had you acquired the asset solely for a creditable purpose.

An amount is not an assessable recoupment if it is included in the termination value of a depreciating asset - see Recoupment of cost.

There are special rules to work out the termination value of depreciating assets in certain circumstances. Some of the more common cases are covered below. If you are not sure of the termination value of a depreciating asset, contact the ATO or your recognised tax adviser.

## Non-arm's length and private or domestic arrangements

The termination value of a depreciating asset is its market value just before you stopped holding it where:

• the termination value would otherwise be less than market value and you did not deal at arm's length with another party to the transaction, or
• you stopped holding the asset as a result of a private or domestic arrangement (for instance, you gave the asset to a family member).

## Selling a depreciating asset with other property

If you received an amount for the sale of several items that include a depreciating asset, you need to apportion the amount received between the termination value of the depreciating asset and the other items. The termination value is only that part of what you received that is reasonably attributable to the asset.

The ATO generally accepts independent valuations as a basis for this apportionment. However, if there is no independent valuation, you may need to demonstrate that your apportionment of the amount is reasonable. Apportionment on the basis of the market values of the various items for which the amount is received will generally be reasonable.

Example: Depreciating asset sold with other property - ignoring any GST impact

Ben receives \$100,000 for the sale of both a chainsaw (a depreciating asset) and a block of land (not a depreciating asset). It would be reasonable to apportion the \$100,000 between:

• the termination value of the chainsaw, and
• the proceeds of sale for the land

based on the relative market values of the chainsaw and the land.

## TOFA and the termination value of a depreciating asset

If the TOFA rules apply to you and you start or cease to have a financial arrangement (or part) as consideration for providing a depreciating asset, the TOFA rules will operate to modify the termination value of the depreciating asset. In general the rules operate to ensure that the termination value is the market value of the depreciating asset at the time of disposal.

Example: TOFA and the termination value of a depreciating asset

ABC Co's financial arrangements are subject to the TOFA rules and it has elected to have these rules apply early. The TOFA rules apply for its income year commencing on 1 July 2009.

ABC Co enters into a contract on 1 July 2009 to sell its depreciating asset to Aus Co for \$100,000. Under the terms of the contract, the depreciating asset will be delivered in 6 months time on 1 January 2010 and has to be paid for on 1 July 2011 (that is, 18 months after delivery). The market value of the depreciating asset on 1 January 2010 is \$90,000.

On 1 January 2010 when ABC Co delivers the depreciating asset it will start to have a financial arrangement as its only subsisting right under the contract is a cash settlable right to receive payment for the disposal of a depreciating asset. The TOFA rules will operate so that ABC Co is taken to have received an amount equal to the market value of the depreciating asset at the time of disposal, that is, \$90,000. This will be the termination value of the depreciating asset. This will also be the 'cost' of Aus Co's financial arrangement under which it makes a gain of \$10,000. This loss does not form part of the termination value of the depreciating asset.

## Depreciating asset you stop using or never use

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 In-house software.

For any other asset, if you stop using it 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.

## Death of the holder

If a person dies and a depreciating asset starts to be held by their legal personal representative (such as the executor of their estate), a balancing adjustment event occurs. The termination value of the asset is its adjustable value on the day the holder died. If they had allocated the asset to a low-value pool, the termination value is the amount of the closing balance of the pool for the income year in which the holder died that is reasonably attributable to the asset - see Low-value pools for information about a low-value pool.

If the asset passes directly to a beneficiary of their estate or to a surviving joint tenant, the termination value is the asset's market value on the day the holder died.

## Depreciating asset used for a non-taxable purpose

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

For depreciating assets that are used wholly for a non-taxable purpose, 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 a non-taxable purpose. These assets include:

• cars that are designed to carry a load of less than one tonne and fewer than nine 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 as a small business entity under the simplified depreciation rules for the income year in which the balancing adjustment event occurred
• assets acquired before 20 September 1985
• assets used solely 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 is disregarded for CGT purposes. A capital loss arising from the disposal of any personal use asset is also disregarded for CGT 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% of the time for private purposes. At the time of its sale, the computer's adjustable value is \$700.

Andrew can claim a deduction of \$60. This is 60% (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% (the proportion of use for a non-taxable purpose) of the difference between the computer's termination value and its cost.

## Leisure facilities and boats

If a balancing adjustment event occurs in relation 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 Decline in value of boats - the balancing adjustment amount is reduced to the extent your 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 21 September 1999 and other depreciating assets acquired before 1 July 2001

Any assessable balancing adjustment amount or capital gain (if the asset was used for a non-taxable purpose) may be reduced if a balancing adjustment event occurs in relation to:

• an item of plant that was acquired before 11.45am (by legal time in the ACT) on 21 September 1999, or
• a depreciating asset acquired before 1 July 2001 that is not plant.

The amount of the reduction is the cost base of the asset for CGT purposes less its cost. The purpose of this reduction is to preserve CGT cost base advantages for assets acquired before these dates.

One reason that the cost base might exceed the cost is indexation of the cost base. There is indexation of the cost base to 30 September 1999 where:

• a CGT event happens to an asset acquired before 11.45am (by legal time in the ACT) on 21 September 1999, and
• the asset was owned for 12 months or more.

Indexation is not available for assets for which capital gains and capital losses are disregarded - see Depreciating asset used for a non-taxable purpose for a list of such assets. However, the balancing adjustment amount is reduced if the asset is:

• a car that is designed to carry a load of less than one tonne and fewer than nine passengers
• a motor cycle
• a valour decoration
• a collectable (such as a painting or an antique) if the first element of its cost is \$500 or less
• an asset acquired before 20 September 1985, or
• an asset used solely to produce exempt income.

In these cases, the balancing adjustment amount is reduced by the difference between the asset's termination value and its cost that is attributable to the use of the asset for a taxable purpose.

See the Guide to capital gains tax 2010 for more information about indexation of a cost base and the impact of indexation on discount capital gains.

End of further information

## 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 you used for a non-taxable purpose, you disregard any capital gain or capital loss.

If you use the one-third of actual expenses method or the logbook 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 a non-taxable purpose.

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

Louise acquired a car on 1 July 2008. During both the 2008-09 and 2009-10 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 2010. 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 used the one-third of actual expenses method to work out her deductions for car expenses, her balancing adjustment amount is reduced by two-thirds. Louise's balancing adjustment would be \$2,100 - that is, one-third of the difference between the termination value and the adjustable value of the car (\$6,300). Louise must include the amount of \$2,100 in her assessable income.

Example: If you use the logbook method - ignoring any GST impact

If Louise used the logbook method to work out her deductions for car expenses and her logbook showed that the level of her business use was 40%, her balancing adjustment amount would be \$2,520. This is 40% 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 only used the cents per kilometre method or the 12% 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. The decline in value 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 method or the logbook method 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 the ATO or your recognised tax adviser.

For a car subject to the car limit - see Car limit - you need to reduce the termination value. You multiply the termination value by the following fraction:

 car limit+ amounts included in the car's second element of costtotal cost of the car

where the total cost of the car is the sum of the first and second elements of cost, ignoring the car limit and after any adjustments for input tax credits - see GST input tax credits. You use the reduced termination value to work out your balancing adjustment amount for the car.

If a car was acquired at a discount and the cost of the car was increased by a discount portion, the termination value of the car must also be increased by that discount portion - see Car acquired at a discount.

If a lessee under a luxury car lease or a hirer under a hire purchase agreement does not acquire the car when the lease or agreement terminates or ends, they are treated as if they sold the asset to the lessor or financier, respectively. The lessee or hirer will need to work out any assessable or deductible balancing adjustment amount.

## Involuntary disposal of a depreciating asset

An involuntary disposal occurs if a depreciating asset 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 served a notice on you inviting you to negotiate a sale agreement. They must have informed you that, if negotiations are unsuccessful, the asset will be compulsorily acquired either under an Australian law, other than chapter 6A of the Corporations Act 2001 or under a foreign law, other than the equivalent of chapter 6A of the Corporations Act 2001
• fixed to land that is disposed of to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land and 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.

You may offset an assessable balancing adjustment amount arising from an involuntary disposal against the cost of one or more replacement assets. If you offset an amount against the cost of a replacement asset for an income year after the one in which the replacement asset's start time occurs, you must also reduce the sum of its opening adjustable value plus any second elements of its cost for that later year.

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 that disposal occurred.

The Commissioner can agree to extend the time limit - for example, if it is unlikely that insurance claims in relation to the disposal of the original asset will be settled within the required time even though you have taken all reasonable steps to have the insurance claims settled.

To offset the assessable balancing adjustment amount, the replacement asset must be wholly used, or installed ready for use, by you for a taxable purpose at the end of the income year in which you incurred the expenditure on the asset or you started to hold it, and you must be able to deduct an amount for it.

## Rollover relief

If rollover relief is available under the UCA rules, no balancing adjustment amount arises when a balancing adjustment event occurs for a depreciating asset. In some cases, rollover relief is automatic - for example, transfers pursuant to a court order following a marriage breakdown.

In some cases, rollover relief must be chosen. If the event arises from a change in the holding of, or in interests in, a partnership asset such as a variation in the constitution of a partnership or in a partnership interest, the transferor and the transferee must jointly choose the rollover relief.

When rollover 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.

The transferee must use the same method that the transferor used to work out the decline in value of the asset.

If the transferor used the diminishing value method, the transferee must also use the same effective life that the transferor was using.

If the transferor used the prime cost method, the transferee must replace the asset's effective life in the prime cost formula with the asset's remaining effective life - that is, any period of the asset's effective life that is yet to elapse when the transferor stopped holding the asset.

The first element of cost for the transferee is the adjustable value of the asset when it was held by the transferor just before the balancing adjustment event occurred.

There are specific record-keeping requirements for rollover relief - see Record keeping for rollover relief.

For the 2007-08 income year and later years the rollover relief available under the UCA rules has been extended to small business entities that choose to claim their capital allowance deductions under the simplified depreciation rules - see Small business entities.

## Limited recourse debt arrangements

If expenditure on a depreciating asset is financed or refinanced wholly or partly by limited recourse debt (including a notional loan under certain hire purchase or instalment sale agreements of goods), excessive deductions for capital allowances are to be included as assessable income. This will occur where the limited recourse debt terminates but has not been paid in full by the debtor. Because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply in working out whether the debt has been fully paid.

If you are not sure what constitutes a limited recourse debt or how to work out your adjustment to assessable income, contact your recognised tax adviser or the ATO.

## Split or merged depreciating assets

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

An example of splitting a depreciating asset is removing a CB radio from a truck. If you install the radio in another truck you may be merging the two assets (radio and truck).

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 start 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 value of the original asset 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 a merged or split depreciating asset - for example, if it is sold - the balancing adjustment amount is reduced:

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

This reduction is not required if the depreciating asset is mining, quarrying or prospecting rights or information, provided certain activity tests are satisfied.

## Foreign currency gains and losses

If you sell a depreciating asset in foreign currency, the termination value of the asset is converted to Australian currency at the exchange rate applicable when you stopped holding the asset. Under the forex provisions, you may make a foreign currency gain or loss if the Australian dollar value of the foreign currency when received differs from the Australian dollar value of the termination value. Any realised foreign currency gain or loss on the transaction is included in assessable income or allowed as a deduction, respectively. If the TOFA rules apply to you, the method that you use to calculate your foreign currency gain or loss may differ.

If the TOFA rules apply to you, then the following may differ:

• the method that you use to calculate your foreign currency gain or loss, and
• the first element of the depreciating asset's cost.

For more information about the TOFA rules, see Guide to the taxation of financial arrangements (TOFA) rules.

End of attention