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 an asset.
The balancing adjustment amount is worked out 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, the excess is included 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 on 1 July 2001. She used the cabinet from that date wholly for a taxable purpose. The cabinet was sold on 30 June 2003 for $1,300. Its adjustable value at that 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 is 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 example
There are situations where these general balancing adjustment rules do not apply:
- If a depreciating asset has been used partly for a non-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 of the non-taxable use see Depreciating asset used for non-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.
- Roll-over 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 Roll-over 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 Capital expenditure of primary producers and other landholders. 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 and instructions (NAT 6709-6.2003) for more information.