If you cease to hold or use a depreciating asset, a balancing adjustment event may occur. A balancing adjustment event occurs for a depreciating asset when:
- you stop holding the asset – for example, it is sold, lost or destroyed
- you stop using it for any purpose 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.
If any of the above occur, you need to calculate a balancing adjustment amount to include in your assessable income or to claim as a deduction.
Balancing adjustments are not made for:
- depreciating assets in a low-value pool – the proceeds from the sale are instead used to reduce the value of the pool, which in turn reduces future depreciation deductions (unless the pool balance has been reduced to zero, in which case a balancing adjustment is made)
- buildings and other capital works, which are dealt with separately under the capital works provisions.
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You calculate the balancing adjustment amount by comparing the asset's termination value (for example, the sale proceeds) with its adjustable value (the cost of the asset less depreciation deductions).
If the asset’s termination value is more than its adjustable value, include the difference in your assessable income.
If the asset’s termination value is less than its adjustable value, you can claim a deduction for the difference.
Generally, the termination value is 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 for the asset, and
- the market value of any 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.
For any asset other than a unit of in-house software, if you stop using it and expect never to use it again but still hold it, the termination value is the market value at that time. For a depreciating asset you decide never to use but still hold, the termination value is the market value when you make the decision.
The termination value of a unit of in-house software is zero if you:
- stop using it and expect never to use again but still hold it, or
- have not used it and decide never to use it, but still hold it.
If a depreciating asset is used only partly for a taxable purpose, you need to reduce the balancing adjustment amount to reflect that non-taxable use. The reduced balancing adjustment amount is included in, or deducted from, your assessable income.
The non-taxable use proportion of the difference between the asset's termination value and its cost can constitute a capital gain or a capital loss.
Sam receives $16,000 for a truck which he used in his business. The truck has been used 40% for private purposes.
At the time of sale, the truck's adjustable value is $20,000. Sam can claim a $2,400 deduction for the reduced balancing adjustment amount (60%, the taxable use proportion of $4,000).End of example
If a depreciating asset is used wholly for a non-taxable purpose, the balancing adjustment amount is reduced to nil.
Replacing an asset will generally not affect the calculations set out above. However, if you dispose of an asset involuntarily – for example, if it was destroyed by fire – you may be able to offset the assessable balancing adjustment amount against the cost of a replacement asset.
- Guide to depreciating assets
- Uniform capital allowance system: disposal of a depreciating asset
- Disposal of a pooled depreciating asset
- Determining market value for tax purposes