1012559705765 | Legal database

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Edited version of your private ruling

Authorisation Number: 1012559705765

Ruling

Question

Are you able to offset the profit made on the sale of individual assets in the General Small Business Pool against the price of a new asset which will be added to the pool during the 2013-14 financial year?

Answer

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

The entity is a Small Business Entity (SBE) and uses the General Small Business Pool (the pool) for depreciation purposes.

At the end of the 2012-13 financial year the closing balance of the pool was X.

The entity is selling most of its assets and expects to receive Z which is more than the opening pool balance from the sale in the 2013-14 financial year.

Before the sale has been effected the entity is going to purchase a new asset for Y in the 2013-14 financial year.

The new asset will be used 100% for business use.

There are no second element costs in relation to the purchase of the new asset.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 328-185(3)

Income Tax Assessment Act 1997 Subsection 328-185(4)

Income Tax Assessment Act 1997 Subsection 328-190(1)

Income Tax Assessment Act 1997 Subsection 328-190(2)

Income Tax Assessment Act 1997 Subsection 328-190(3)

Income Tax Assessment Act 1997 Section 328-200

Income Tax Assessment Act 1997 Subsection 328-210(2)

Income Tax Assessment Act 1997 Subsection 328-215(1)

Income Tax Assessment Act 1997 Subsection 328-215(2)

Reasons for decision

Summary

The correct method to account for the profit on the sale of pool assets is to ascertain whether the closing balance of the pool for the 2013-14 financial year is less than zero. As the amount here is less than zero that is the amount which is included in your assessable income. You are also entitled to a deduction for depreciation for the pool in the 2013-14 financial year.

Detailed reasoning

SBE's can choose to deduct amounts for most of their depreciating assets on a diminishing value basis using a pool that is treated as a single depreciating asset.

Under subsection 328-185(3) of the Income Tax Assessment Act 1997 (ITAA 1997) it states a depreciating asset:

(a) that you hold just before, and at the start of, the first income year for which you are, at last were, a small business entity; and

(b) for which you calculate your deductions under this Subdivision instead of under Division 40; and

(d) that you have started to use or have installed ready for use, for a taxable purpose;

is automatically allocated to your general small business pool or long life small business pool according to its effective life.

Subsection 328-185(4) of the ITAA 1997 states a depreciating asset that you start to use, or have installed ready for use, for a taxable purpose during an income year for which you are a small business entity and you choose to use this Subdivision is allocated to the appropriate pool at the end of that year.

The closing balance is worked out under section 328-200 of the ITAA 1997 as follows:

Step 1 - Add to the opening pool balance of the pool for the income year:

(a) the sum of the taxable purpose proportions of the adjustable values of depreciating assets you started to use, or have installed ready for use, for a taxable purpose during the income year and that are allocated to that pool; and

(b) the taxable purpose proportion of any cost addition amounts (see subsection 328-190(3)) for the income year for assets allocated to the pool.

Step 2 - Subtract from the step 1 amount:

(a) the taxable purpose proportions of the termination values of depreciating assets allocated to the pool and for which a balancing adjustment event occurred during the income year; and

(b) your deduction under subsection 328-190(1) for the pool for the income year; and

(c) your deductions under subsection 328-190(2) for depreciating assets you started to use, or have installed ready for use, for a taxable purpose during the income year and that are allocated to that pool; and

(d) your deductions under subsection 328-190(3) for the income year for cost addition amounts for assets allocated to the pool.

Step 3 - The result is the closing pool balance of the pool for the income year.

Section 328-215 of the ITAA 1997 discusses disposal etc of depreciating assets.

Subsection 328-215(1) of the ITAA 1997 sets out adjustments you may have to make if a balancing adjustment event occurs for a depreciating asset for which you calculate your deductions under this Subdivision.

Subsection 328-215(2) states if the asset is allocated to a pool and:

(a) the closing pool balance of the pool for the income year in which the event occurred is less than zero; or

(b) the amount worked out under subsection 328-210(2) for that income year is less than zero;

the amount by which the balance or amount is less than zero is included in your assessable income.

Subsection 328-190(2) states your deduction for each depreciating asset that you start to use, or have installed ready for use, for a taxable purpose during an income year for which you are a small business entity and choose to use this Subdivision is 15% of the taxable purpose proportion of its adjustable value.

In your case the opening balance for the pool for the 2013-14 financial year was X. Most of the entity's assets are being sold in the 2013-14 financial year. You expect to receive Z from the sale. Also during the year you will be adding a new asset, costing Y, to the pool.

The following table outlines the calculations for working out the depreciation deduction and the closing balance of the pool:

Depreciation deduction		Depreciation calculation	Deduction

Opening balance of pool	X	X x 30%	X x 30%
Asset purchase	Y	Y x 15%	Y x 15%
Total deduction			A


Closing Balance of Pool
Opening balance of pool			X
Add:
purchase of asset			Y

Less:
Depreciation deduction			A
Disposal proceeds			Z

Closing balance of pool			Minus amt

As the closing balance of the pool for the 2013-14 financial year will be less than zero the amount to be included in your assessable income for the 2013-14 financial year will be the amount by which that amount is less than zero. You are however also entitled to a deduction for depreciation of the pool of A.

The opening balance of your pool for the 2014-15 financial year will be zero.

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