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Edited version of your written advice
Authorisation Number: 1051326746751
Date of advice: 12 January 2018
Ruling
Subject: Balancing adjustment
Question
Are you entitled to a deduction for the work related portion of the balancing adjustment amount of your asset in the 20XX-XX income year?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 20XX
The scheme commenced on
1 July 20XX
Relevant facts
You used your asset for your work and have been claiming a deduction in relation to the asset for a few years.
Your asset broke down and was taken to your employer’s work yard.
Your employer gave you the use of the company’s asset.
You started saving to repair the asset.
The asset was vandalised and was not worth fixing.
The asset was not insured as it was going to be sold.
You sold the asset.
The asset had a written down tax value of $xxxx as at 30 June 20XX.
The asset was mainly used for your work.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 40.
Reasons for decision
Detailed reasoning
Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the tax treatment of depreciating assets.
Your asset is regarded as a depreciating asset under Division 40 of the ITAA 1997.
Under subdivision 40-D of the ITAA 1997 you may have to make an adjustment to your taxable income if you stop holding or stop using a depreciating asset. This adjustment is known as a balancing adjustment.
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.
An asset can have more than one balancing adjustment. For example a balancing adjustment event may occur if the asset stops being used and is later followed by another balancing adjustment when the asset is subsequently sold.
You work out the balancing adjustment amount by comparing the asset’s termination value and its adjustable value at the time of the balancing adjustment event.
Subsection 40-285(2) of the ITAA 1997 provides that you can deduct an amount if the assets termination value is less than its adjustable value at the time of the balancing event.
The termination value is generally 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 and the market value of non-cash benefits you receive for the asset.
If you stop using an asset and expect never to use it again but still hold it, the termination value is the market value when you stop using it. 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 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). The adjustable value of a depreciating asset at a particular time is the opening adjustable value for that year, less its decline in value for the year up to that time.
Section 40-290 of the ITAA 1997 states where a depreciating asset is used for both a taxable and non-taxable purpose, the balancing adjustment amount must be reduced by the amount that is attributable to the use for a non-taxable purpose. The sum of reductions over the life of the asset / total decline is used in calculating the reduction as outlined in the formula in section 40-290.
Therefore in your case as the asset was not used solely for a taxable purpose, the allowable deduction needs to be reduced accordingly. As the asset was not used at all for a taxable purpose in the 20XX-XX income year, the total relevant amount for this year is added to the other non-taxable amounts in previous years in calculating the reduction.
That is, you are only eligible for a deduction for the income producing portion of that loss. Your balancing adjustment amount needs to be reduced by the total amounts that are attributable to the use of the asset for private and other non-taxable purposes.
As the termination value of the asset is less than its adjustable value when the balancing adjustment event occurred, you are entitled to claim a deduction under Division 40 of the ITAA 1997 for the balancing adjustment amount, reduced by any amount that is attributable to the private or other non-taxable use.
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 ato.gov.au.