Edited version of private advice

Authorisation Number: 1052365757062

Date of advice: 12 March 2025

Ruling

Subject: Deductions

Question 1

How are the sale proceeds for your motor vehicle, which was claimed under temporary full expensing rules, reported according to section 328-215(4) of the Income Tax Assessment Act 1997?

Answer 1

You will need to report the termination value of your old motor vehicle as assessable income in the 20XX-XX income year in accordance with section 328-215(4) of Income Tax Assessment Act 1997 (ITAA 1997). Under the temporary full expensing rules, in accordance with section 328-180 of ITAA 1997, you initially claimed an immediate deduction for the motor vehicle in the 20XX-XX income year when you purchased the vehicle. The old vehicle was not added to the general small business pool in which to claim the deduction. Subsection 328-185(1) of ITAA 1997 does not allow you a choice to add a depreciating asset to the general small business pool if you have deducted or can deduct a depreciating asset under section 328-180 of ITAA 1997.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are carrying on a business activity.

Your aggregate turnover for the 20XX-XX year and previous income year was less than $XX.

You normally claim deductions under the simplified depreciation rules specifically using the general small business pool. You commenced using a general small business pool from an earlier year.

You purchased a motor vehicle on a specified date and the business purpose proportion of motor vehicle cost limit was claimed under temporary full expensing (TFE) rule in a specified year.

In the specified year, you sold the motor vehicle and its business purpose proportion on disposal was for a specified amount. The vehicle was replaced with a new vehicle for a specified amount that was claimed via the general small business pool. You didn't receive any cash for the sale proceeds because the old vehicle was traded-in to purchase the new vehicle.

Contentions

You stated that you would have continued using the small business pool if the TFE rule had not been implemented.

The old vehicle was trade-in at market value.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-25(1)

Income Tax Assessment Act 1997 section 40-30(1)

Income Tax Assessment Act 1997 section 40-30(2)

Income Tax Assessment Act 1997 section 40-300

Income Tax Assessment Act 1997 section 40-300(2)

Income Tax Assessment Act 1997 section 40-305

Income Tax Assessment Act 1997 section 328-220(1)

Income Tax Assessment Act 1997 section 328-D

Income Tax Assessment Act 1997 section 328-175

Income Tax Assessment Act 1997 section 328-175(1)

Income Tax Assessment Act 1997 section 328-180

Income Tax Assessment Act 1997 section 328-180(1) to 328(5)

Income Tax (Transitional Provisions) Act 1997 section 328-181

Income Tax (Transitional Provisions) Act 1997 section 328-181(1)

Income Tax (Transitional Provisions) Act 1997 section 328-181(5)

Income Tax Assessment Act 1997 section 328-185

Income Tax Assessment Act 1997 section 328-185(1)

Income Tax Assessment Act 1997 section 328-185(7)

Income Tax Assessment Act 1997 section 328-210

Income Tax Assessment Act 1997 section 328-220(1)

Income Tax Assessment Act 1997 section 328-215

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

Income Tax Assessment Act 1997 section 328-215(3)

Income Tax Assessment Act 1997 section 328-215(4)

Reasons for decision

Depreciating assets and small business entities

Subsection 40-30(1) of the ITAA 1997 defines a depreciating asset as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except land and an item of trading stock. An intangible asset is also excluded unless it is mentioned in subsection 40-30(2) of the ITAA 1997.

A motor vehicle is a depreciating asset if it is not trading stock.

A taxpayer is entitled to a deduction that is the business purpose proportion of the depreciating asset in accordance with subsection 40-25(2) of ITAA 1997.

Under subsection 40-25(1) and Subdivision 328-D of ITAA 1997, small business entities can choose to calculate their deductions under Subdivision 328-D, instead of under Division 40, for an income year for all the depreciating assets, for their business use proportion, that the small business entity holds. (Note: there are certain assets outlined in section 328-175 of ITAA 1997 that the depreciation rules stated in Subdivision 328-D cannot be applied to.) Small business entities who choose to apply Subdivision 328-D to claim a deduction for their depreciating assets rely on:

•                Assets costing less than $XX as per section 328-180 of ITAA 1997; or

•                The general small business pool rules under section 328-185 of ITAA 1997.

In accordance with subsection 328-220(1) of ITAA 1997 if a taxpayer is a small business entity for an income year, Subdivision 328-D continues to apply to a taxpayer's general small business pool for that year and later income years. A Note in subsection 328-175(1) further confirms the length of time general small business pool rules apply to a relevant taxpayer. For the purposes of temporary full expensing, a small business entity cannot opt-out of temporary full expensing if it uses the general small business pool, also known as simplified depreciation rules.

Immediate/instant write-off of the business use proportion of depreciating asset

Subsection 328-180(1) of ITAA 1997 outlines the rules for assets costing less than $XX. A taxpayer can claim an immediate deduction for the business purpose proportion of a depreciating asset for the income year in which the taxpayer starts to use the asset or have it installed ready for use if:

(a)           the taxpayer qualifies as a small business entity for the income year in which the taxpayer started to hold the asset;

(b)           the taxpayer chose to use Subdivision 328-D of ITAA 1997 for each of those years; and

(c)            the depreciating asset cost at the end of the income year in which the taxpayer starts to use it or have it installed less than the small business instant asset write-off threshold. The threshold stated in section 328-180 is $XX.

We note, the government of the day have amended the threshold limit for specific periods of time to accelerate the depreciation allowances.

Subsection 328-180(1) has a Note that states the threshold could be affected by section 328-181 of Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997). Subsection 328-181(1) of IT(TP)A 1997 clarifies that it is referencing to the 2020 budget announced at 7.30pm in the Australian Capital Territory on X October 20XX. Subsection 328-181(2) states for the purposes of determining if subsection 328-180(1) of ITAA 1997 allows taxpayers to deduct an amount in relation to a depreciating asset, disregard the paragraph of subsection 328-180(1) that sets the limit of $XX on the cost of the asset, during the period commencing 20XX budget time and ending 30 June 20XX, the taxpayer:

(a)           start to hold the asset; and

(b)           start to use it, or have it installed ready for use, for a taxable purpose.

Therefore, the $XX threshold has been removed during this specific time period.

Subsections 328-180(2) to 328-180(5) outlines the law regarding the deduction that may be available for the second element of the cost of a depreciating asset for the business purpose proportion of the asset.

Section 328-180 of ITAA 1997 does not allow for the cost of a depreciating asset to be added to a general small business pool, only if it is the second element of the asset's cost; refer to subsection 328-180(3).

Disposal of assets

Section 328-215 of ITAA 1997 sets out adjustments a taxpayer may make if a balancing adjustment event occurs for a depreciating asset for which a taxpayer calculates their deductions under Subdivision 328-D Capital allowances for small business entities.

Subsections 328-215(2) and (3) of ITAA 1997 outline the adjustments required if the asset was allocated to a general small business pool.

Subsection 328-215(4) of ITAA 1997 states,

If the asset was one for which you deducted an amount under section 328-180, you include the taxable purpose proportion of the asset's termination value in your assessable income.

As stated above, section 328-180 outlines the rules when claiming an immediate deduction for the depreciating asset.

Section 40-300 of ITAA 1997 sets out the rules for working out the termination value of a depreciating asset. The termination value is worked out as at the time when the balancing adjustment event occurs. Generally, the termination value for the asset will be determined from a balancing adjustment event listed in the table in accordance with subsection 40-300(2) of ITAA 1997. If one of these items applies to the taxpayer's circumstances, the amount specified from that item will be the termination value of the asset. Otherwise, the amount that the taxpayer has received in accordance with section 40-305 of ITAA 1997 will be the termination value for the depreciating asset.

Using general small business pool

Subdivision 328-D of ITAA 1997 outline various sections of the law that provide the rules for the operation of a general small business pool. Subsection 328-185(1) states that if a taxpayer is a small business entity for an income year, they can choose to use Subdivision 328-D in that year and the taxpayer can deduct the amount for the decline in value of your depreciating asset through a pool.

However, a small business entity that has deducted or can deduct the decline in value under section 328-180 of ITAA 1997, as outlined above as an immediate/instant deduction, cannot add the depreciating asset(s) to the pool.

Subsection 328-185(7) of ITAA 1997 states once a depreciating asset is allocated to a general small business pool it cannot be reallocated to another depreciation method. This includes if the taxpayer ceases to be a small business entity in the future or the taxpayer chooses not to use Subdivision 328-D of ITAA 1997.

Section 328-210 of ITAA 1997 allows for a small business entity using the general small business pool to claim the full closing balance of the pool in an income year if the balance is less than $1,000. However, during the period of time when small business entities could use temporary full expensing, subsection 328-181(5) of IT(TP)A 1997 stated the words "less than $XX but" in subsection 328-210 of ITAA 1997 were disregarded. As a result, from 20XX budget announcement to XX June 20XX, if a small business entity's closing balance of the general small business pool was more than zero, that entity was entitled to claim the total closing balance as a deduction in that income year, regardless of the amount.

Application to your circumstances

You were a small business entity in the relevant income year. In the specified income year you acquired a vehicle and you claimed an immediate deduction for the business purpose proportion of the vehicle's cost under the temporary full expensing rules in accordance with subsection 328-180(1) of ITAA 1997. You made the choice in a specified year to commence using a general small business pool under Subdivision 328-D of ITAA 1997 and in subsequent years you continued to use the general small business pool.

You purchased a new vehicle in the specified year and claimed an immediate deduction for the vehicle in the specified income year in accordance with subsection 328-180(1) of ITAA 1997. Section 328-185 of ITAA 1997 does not allow you to add a depreciating asset to the general small business pool when you can deduct the depreciating asset immediately for income tax purposes. Therefore, section 328-185 of ITAA 1997 required you to deduct an immediate write-off of the vehicle because you could claim an immediate deduction under section 328-180 of ITAA 1997 applying the temporary full expensing rules. Subsection 328-185 of ITAA 1997 does not provide you no choice how to claim the deduction for the vehicle.

Therefore, in accordance with subsection 328-215(4) of ITAA 1997, because you claimed an immediate deduction for the business purpose proportion of the vehicle you acquired in the specified year, when you sold the vehicle in specified year the business purpose proportion of the vehicle's termination value will be required to be reported in your assessable income for the relevant financial year.