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Edited version of your written advice
Authorisation Number: 1051192925251
Date of advice: 21 February 2017
Ruling
Subject: Sale of depreciating asset
Question
Is a balancing adjustment amount included in your assessable income in the 20YY-ZZ income year, where the sale proceeds exceed the adjustable values?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 20ZZ
The scheme commenced on
1 July 20YY
Relevant facts
The business signed a contract in 20XX to sell two depreciating assets.
The buyer was unable to obtain finance at this time and a rental agreement for a monthly fee commenced. Rent was paid from 20XX to 20YY.
The buyer obtained finance during the 20YY-ZZ for asset 1.
The business input two tax invoices for the assets, both dated 20YY.
Payment for asset 1 was received in 20YY.
The payment for asset 2 was via vendor finance. Several payments were made. All payments were made in the 20YY-20ZZ income year.
The assets were always used for a taxable purpose.
The adjustable value for the assets was less than the sale proceeds received.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 40.
Reasons for decision
Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the tax treatment of depreciating assets.
The assets have been used for a taxable purpose and are regarded as depreciating assets under Division 40 of the ITAA 1997.
When a depreciating asset is sold, a balancing adjustment event occurs. As outlined in section 40-295 of the ITAA 1997, a balancing adjustment event occurs when:
● you stop holding the asset, for example, if the asset is sold, or
● you stop using it for any purpose and expect never to use it again.
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.
An amount is included in your assessable income under section 40-285 of the ITAA 1997 if the asset's termination value is more than its adjustable value just before the event occurred.
In your case the business was still the legal owner and holder of the assets until they were sold. Although a contract was signed in 20XX, the business still owned the assets and no balancing adjustment event occurred at this time. The business rented the assets from 20XX to 20YY. As the assets were being used by the business to earn rental income, the balancing adjustment event occurred after this. That is the balancing adjustment event for both assets occurred in the 20YY-ZZ income year.
The termination value for each asset is the amount of money received for their sale.
The opening adjustable value of a depreciating asset for an income year is its adjustable value to you at the end of the previous income year (subsection 40-85(2) of the ITAA 1997).
If the termination value of the depreciating asset is more than its adjustable value, the difference is included in your assessable income in the income year in which the balancing adjustment event occurred (subparagraph 40-285(1)(b) of the ITAA 1997).
As the sale proceeds received for the sale of the asset (termination value) is more than the adjustable value of each asset, the difference is included in your assessable income.
As the assets were sold in the 20YY-ZZ income year, the balancing adjustment amounts are included in the assessable income in that year.
For further information about balancing adjustments, please refer to the Australian Taxation Office's publication Guide to depreciating assets. This booklet can be found on the website www.ato.gov.au.