There have been a number of changes to the depreciation provisions that apply to the disposal of plant under business tax reform. These changes take effect under the New Business Tax System (Capital Allowances) Act 1999 which received Royal Assent on 10 December 1999.
Under the changes, any capital gain or capital loss arising from disposal of an item of plant after 11.45am (by legal time in the ACT) on 21 September 1999 is disregarded. The gain or loss resulting from the disposal is treated as a further balancing adjustment and is either included in assessable income or allowed as a deduction.
If an item of plant is disposed of after 11.45am on 21 September 1999 for more than its cost, the amounts that would be included in assessable income are:
- the balancing adjustment, and
- the further balancing adjustment.
If you dispose of an item of plant at or before 11.45am on 21 September 1999, then you only include the balancing adjustment in your assessable income and the rest is a capital gain (if the capital proceeds are greater than the cost base or indexed cost base).
Assessable balancing adjustment
An assessable balancing adjustment arises where the termination value of the plant exceeds the written down value of the plant disposed of. The balancing adjustment represents the amount of depreciation that has been claimed or could have been claimed upon disposal of the plant.
Further balancing adjustment
The further balancing adjustment arises where the termination value of the item of plant exceeds its cost.
The following rules apply to calculate the further balancing adjustment if you dispose of an item of plant after 11.45am (by legal time in the ACT) on 21 September 1999:
- if you acquired the plant on or before that time, the further balancing adjustment equals the termination value of the item of plant minus its cost base or indexed cost base
- if you acquired the plant after that time, the further balancing adjustment equals the termination value of the item of plant minus its cost.
Plant acquired and disposed of after 11.45am on 21 September 1999
When plant is acquired and disposed of after 11.45am (by legal time in the ACT) on 21 September 1999, the further balancing adjustment is the difference between the termination value (usually the sale proceeds) of the plant and its written down value plus the balancing adjustment amount.
Plant acquired before 11.45am on 21 September 1999 but disposed of after this time
For plant disposed of after 11.45am (by legal time in the ACT) on 21 September 1999 but acquired before this time, the further balancing adjustment is the difference between the termination value and the cost base of the plant indexed up to 30 September 1999. The purpose of this is to:
- take into account expenditure other than the cost of the plant, and
- preserve the benefit of indexation on items of plant that have been owned for at least 12 months before disposal.
The cost base and the indexed cost base are to be calculated in accordance with the CGT provisions.
Termination value is less than undeducted cost
You can claim a deduction if you dispose of an item of plant for less than its undeducted cost. A deductible balancing adjustment arises where the termination value of an item of plant (that is, usually its sale price) is less than its undeducted cost. The difference is deductible in the year of disposal if the plant is being used solely for income-producing purposes.
Undeducted cost is less than reduced cost base
If you dispose of an item of plant after 11.45am (by legal time in the ACT) on 21 September 1999, you may be able to claim a further deduction. Where the undeducted cost of the item of plant is also less than its reduced cost base (as calculated under the CGT regime), you can claim a further deduction for the difference. This further deduction will not be reduced even if you have used the plant for any non-income-producing use.
Disposal of plant where no depreciation claimed or plant is incomplete
Subdivision 42-GA of ITAA 1997 ensures that the further balancing adjustment provisions apply to plant where no depreciation has been claimed or where there is an incomplete unit of plant. In these situations, the further balancing adjustment will include as income or allow as deduction those amounts that would have been a capital gain or capital loss under the CGT provisions.
The further balancing adjustment calculation could arise in the following circumstances:
- where an item of plant is completed and disposed of before it is used in your income-producing process
- where an item of plant is destroyed before its completion or you disposed of it before its completion.
The further balancing adjustment calculation must be made in the year in which the balancing adjustment event occurs. If you are not sure of the balancing adjustment calculation, contact your professional tax adviser or ring the ATO.
The purpose of this is to take into account expenditure other than the cost of the plant and to preserve the benefit of indexation on items of plant that have been owned for at least 12 months before this time.
Plant excluded from the further balancing adjustment provisions
The further adjustment provisions do not apply to the following:
- cars that are designed to carry a load of less than one tonne and less than 9 passengers
- motor cycles
- valour decorations
- collectables acquired for $500 or less
- personal use assets acquired for $10,000 or less
- plant used to produce exempt income-plant acquired before 20 September 1985.
Balancing adjustments for plant partly used for business
Where you are using an item of plant for both income-producing and non-income-producing purposes, the difference between the undeducted cost and the termination value will be reduced to reflect any non-income-producing use of that item of plant.
You must compare the termination value on the sale, loss or destruction of an item of plant-including insurance proceeds-with both the undeducted cost of the item and its written down value. The written down value of an item is the cost of that item less the total depreciation deductions actually allowed.
The following example shows you how to work out written down values.
Example: Working out adjustments on the sale of an item of plant only partly used for business
Elizabeth acquired an item costing $1,000 on 1 July 1999. She used it for both business and private purposes equally for 2 years. She sold the item on 30 June 2001.
Elizabeth adopted the prime cost method to work out the depreciation. The relevant prime cost rate is 27 per cent. She would work out undeducted cost and written down value as follows:
Transaction |
Undeducted cost |
Business use |
Written down value |
|---|---|---|---|
1.7.99 |
$1,000 |
- |
$1,000 |
Depreciation at 27% |
$270 |
50% |
$135> |
30.6.2000 |
$730 |
- |
$865 |
1.7.2000 |
$730 |
- |
$865 |
Depreciation at 27% |
$270 |
50% |
$135 |
30.6.2001 |
$460 |
- |
$730 |
End of example
Assessable adjustments
If the termination value on disposal is more than the written down value, you must include the difference in your assessable income. In the first instance the assessable amount cannot be more than the sum of deductions actually allowed for depreciation on the item. However, if you sell an item of plant after 21 September 1999, there may be a further assessable amount if the termination value is more than the cost of the item.
Example: Assessable adjustment
If Elizabeth sold the item for $800, she would recover $70-the amount by which the termination value is more than the written down value of $730. The amount of $70 is treated as assessable income.
End of exampleNo adjustments
Where the termination value is between the written down value and undeducted cost, no adjustment is required.
Example: No adjustment
If Elizabeth sold the item for $700, there would be no adjustment because the termination value is less than the written down value of $730 but greater than the undeducted cost of $460.
End of exampleDeductible adjustments
Where the termination value is less than both the written down value and undeducted cost, the difference between the termination value and the undeducted cost represents a deduction. However, you are eligible for a deduction only for the percentage of business or other income-producing use of that item of plant. If you sell an item after 21 September 1999, you will be eligible for a further deduction if the undeducted cost is also less than the reduced cost base. You do not reduce this further deduction to reflect any non-income-producing use of that item.
Example: Deductible adjustment
If Elizabeth sold the item for $400, she could claim a deduction for $30-that is, 50 per cent of the amount by which the undeducted cost of $460 exceeds the termination value.
End of exampleSpecial balancing adjustment rules for cars
If your car has been disposed of, lost or destroyed you may need to work out a balancing adjustment. The following examples show you how to do this. Use this method of working out your balancing adjustment if you use the one-third of actual expenses method or the logbook method of claiming car expenses. If you use the cents per kilometre method or the 12 per cent of original value method of claiming car expenses, you will not have to work out a balancing adjustment because those methods do not result in depreciation deductions. If you switch between these methods you may have to follow special rules to work out your balancing adjustment.
Where a car subject to the depreciation cost limit described above is disposed of, lost or destroyed, the termination value is adjusted. It is reduced to an amount determined by multiplying the termination value by the fraction calculated when you divide the depreciation limit for that car by the original cost of the car.
The calculation of balancing adjustments for cars is not affected by the depreciation changes that applied from 11.45am on 21 September 1999.
Example: Where you switch between the one-third of actual expenses method and the logbook method
Dennis acquired a car on 1 July 1997 for $20 000. He elected to use the prime cost method (PC) to work out the depreciation on his car. During 1997-98 and 1998-99, Dennis used the one-third of actual expenses method to work out the deduction for his car expenses. In 1999-2000, he switched to the logbook method. His logbook showed that Dennis used the car for business purposes for 40 per cent of the time.
On 1 July 2000-that is, in the 2000-01 income year-Dennis disposed of the car for $15 000. He worked out the car's undeducted cost and written down value-one-third of the notional amount for the first 2 years then 40 per cent for the third year-as follows:
Transaction |
Undeducted cost |
Business use |
Written down value |
|---|---|---|---|
Cost of car |
$20,000 |
- |
$20,000 |
Depreciation for 1997-98 |
$3,000 |
1/3 |
$1,000 |
Closing balance |
$17,000 |
- |
$19,000 |
Depreciation for 1998-99 |
$3,000 |
1/3 |
$1,000 |
Depreciation for 1999-2000 |
$3,000 |
40% |
$1,200 |
Closing balance |
$11,000 |
- |
$16,800 |
The balancing adjustment in this example is nil, as the termination value of the car falls between the written down value of $16,800 and the undeducted cost of $11,000.
If Dennis had sold the car for more than the written down value-say for $19,000-he would have to include in his assessable income the difference between $19,000 and the written down value of $16,800-that is, $2,200.
If he had sold the car for less than the undeducted cost-say for $10,000-he would be allowed a deduction of $356 [($11,000 − $10,000) × ($3,200 ÷ $9,000)], where $3,200 is the sum of all actual depreciation ($1,000 + $1,000 + $1,200) and $9,000 is the sum of all notional depreciation ($3,000 + $3,000 + $3,000).
End of exampleExample: Where you use only the one-third of actual expenses method or the logbook method
Louise acquired a car on 1 July 1998 for $26,000. She elected to use the diminishing value method (DV) to work out the depreciation on her car. During both 1998-99 and 1999-2000, Louise used the one-third of actual expenses method to work out the deduction for her car expenses.
On I July 2000-that is, in the 2000-01 year-Louise disposed of the car for $24,500. She worked out the car's undeducted cost and the written down value-one-third of the notional amount-as follows:
Transaction |
Undeducted cost |
Business use |
Written down value |
|---|---|---|---|
Cost of car |
$26,000 |
- |
$26,000 |
Depreciation for 1997-98 |
$5,850 |
1/3 |
$1,950 |
Closing balance |
$20,150 |
- |
$24,050 |
Depreciation for 1999-2000 |
$4,534 |
1/3 |
$1,511 |
Closing balance |
$15,616 |
- |
$22,539 |
The balancing adjustment in this example is $1,961 ($24,500 − $22,539). Louise must include the amount of $1,961 in her assessable income.
If Louise had sold her car for an amount between the written down value and undeducted cost-say for $19,000-there would be no balancing adjustment.
If she had sold the car for less than the undeducted cost-say for $15,016-she would be allowed a deduction of $200 [($15,616 − $15,016) × ($3,461 ÷ $10,384)], where $3,461 is the sum of all actual depreciation ($1,950 + $1,511) and $10,384 is the sum of all notional depreciation ($5,850 + $4,534).
End of exampleIf you use either the one-third of actual expenses method or the logbook method for one period after you begin using the car and for another period you use either the cents per kilometre method or the 12 per cent of original value method, you have to reduce your balancing adjustment to reflect the extent to which you used each method. 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, contact your professional tax adviser or ring the ATO.