Edited version of private ruling

Authorisation Number: 1052377179565

Date of advice: 26 March 2025

Ruling

Subject: Disposal of a depreciating asset

Question

Is the termination value of a depreciating asset that was acquired in the 20YY-YY income year and depreciated under temporary full expensing, reported in accordance with subsection 328-215(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended on 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances.

You have carried on a business activity from an earlier income year.

Your aggregate turnover for the 20YY-YY income year and the previous income year was less than $10 million.

You commenced using the simplified depreciation rules in an earlier income year. You continue to use these rules for all the assets you have held in your business from that income year.

You purchased a depreciating asset in the 20YY-YY income year. The asset was installed ready for use in the same income year for 100% business purposes. You claimed an instant write-off of the asset under temporary full expensing in the 20YY-YY income year.

You traded in the old asset for X amount in order to acquire a new asset in the 20YY-YY income year. The new asset was allocated to a general small business pool and depreciated at a single rate.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-15

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 subsection 40-25(2)

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

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

Income Tax Assessment Act 1997 section 40-85

Income Tax Assessment Act 1997 subsection 40-285(1)

Income Tax Assessment Act 1997 section 40-295

Income Tax Assessment Act 1997 section 40-300

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-120

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax Assessment Act 1997 section 328-175

Income Tax Assessment Act 1997 section 328-180

Income Tax Assessment Act 1997 subsection 328-180(1)

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

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

Income Tax Assessment Act 1997 section 328-215

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

Income Tax (Transitional Provisions) Act 1997 section 328-180

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

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.

Section 40-15 of the ITAA 1997 provides that you can deduct the cost of a depreciating asset and to spread the deduction over its effective life under Division 40 of the ITAA 1997. However, the deduction that you are entitled to is only limited to the business purpose proportion of a depreciating asset in accordance with subsection 40-25(2) of the ITAA 1997.

Section 40-25 of the ITAA 1997 gives you a choice to work out and deduct the amount equal to the decline in value of a depreciating asset under Division 328 other than Division 40 of the ITAA 1997 if you meet small business entity requirements (section 328-175 of the ITAA 1997 also confirms the choice). Once you have made the choice for an asset, you cannot change it for a later income year even if you are no longer a small business entity.

Section 328-110 of the ITAA 1997 defines a small business entity for an income year (the current year) as:

•                     you carry on a business in the current year; and

•                     one or both of the following applies:

-                    you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

-                    your aggregated turnover for the current year is likely to be less than $10 million.

Section 328-120 and 328-115 of the ITAA 1997 provide the meaning of annual turnover and aggregated turnover.

Using a General Small Business Pool

Subdivision 328-D of the ITAA 1997 sets out the simplified depreciation rules for a small business entity.

Under subsection 328-185(1) of the ITAA 1997, if you are a small business entity for an income year, and you have chosen to use Subdivision 328-D of the ITAA 1997 for that year, you deduct amounts for your depreciating assets through a pool to which these assets are allocated (known as a general small business pool). The general small business pool allows you to deduct amounts for these assets as if they were a single asset, thereby simplifying your calculations. You use one rate for the pool.

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

However, it is in the same subsection 328-185(1) of the ITAA 1997, where it states that assets for which you have deducted or can deduct an amount under section 328-180 of the ITAA 1997 are prevented from entering a general small business pool (the statement is written in the bracket).

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

Section 328-180 of the ITAA 1997 outlines the instant write-off rules for assets costing less than $1,000 (the threshold).

Under subsection 328-180(1) of the ITAA 1997, you deduct the taxable (business) purpose proportion of the adjustable value of a depreciating asset for the income year in which you start to use the asset, or have it installed ready for use, for a taxable purpose if:

•                     you were a small business entity for that year and the year in which you started to hold it; and

•                     you chose to use Subdivision 328-D of the ITAA 1997 for each of those years; and

•         the asset is a depreciating asset whose cost as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose, is less than $1,000 (the threshold).

Section 40-85 of the ITAA 1997 provides that the adjustable value of a deprecating asset for a time in the income year in which you first use it, or have it installed ready for use, for any purpose, is its cost less its decline in value up to that time. This means at the end of that income year, a depreciating asset costing less than $1,000 (the threshold) will be instantly written off.

However, subsection 328-180(1) of the ITAA 1997 has a Note that states the threshold of $1,000 could be affected by section 328-181 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997).

The 2020 budget was announced at 7.30pm in the Australian Capital Territory on 6 October 2020 according to section 328-180 of the IT(TP)A 1997. Section 328-181 of the IT(TP)A 1997 introduces the temporary full expensing (TFE) for depreciating assets under the 2020 budget. The TFE rules state that for the purposes of determining whether subsection 328-180(1) of the ITAA 1997 allows you to deduct an amount in relation to a depreciating asset, disregard the paragraph of that subsection (which sets the threshold of $1,000 on the cost of the asset). This means in the period beginning at the 2020 budget time and ending on 30 June 2023, if you:

•                     start to hold the asset; and

•                     start to use it, or have it installed ready for use, for a taxable purpose

you can instantly write off the depreciating asset that costs you any amount as the threshold of $1,000 is removed.

Because of the joint effect of subsection 328-180(1) and subsection 328-185(1) of the ITAA 1997 and section 328-181 of the IT(TP)A 1997, any depreciating assets (regardless of the costing) claimed under the TFE rules are prevented from entering a general small business pool.

Disposal of assets claimed under the TFE rules

Section 40-295 of the ITAA 1997 gives the meaning of balancing adjustment events, which includes the event when you stop holding a depreciating asset. Note 1 of subsection 40-285(1) of the ITAA 1997 states that the most common balancing adjustment event is where you sell a depreciating asset.

Section 328-215 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 Subdivision 328-D of the ITAA 1997. As stated above, assets claimed under the TFE rules in accordance with section 328-180 of the ITAA 1997 are prevented from entering a general small business pool, therefore, subsection 328-215(4) of the ITAA 1997 is applied. This means you need to include the taxable purpose proportion of the asset's termination value as assessable income.

Section 40-300 of the 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. In the case when you sell a depreciating asset previously claimed under the TFE rules, the termination value of the asset is the market value of the asset when you stop using it or having it installed ready for use.

Application to your circumstances

You have carried on a business activity since an earlier income year.

You made the choice in an earlier income year to commence using the simplified depreciation rules under Subdivision 328-D of the ITAA 1997, and in subsequent years, you continue to use these rules for the assets that you have held in your business.

You met the small business entity requirements for the 20YY-YY income year.

You acquired a depreciating asset in the 20YY-YY income year. You had it installed ready for use in the 20YY-YY income year. You claimed an instant deduction for the taxable purpose proportion (which is 100%) of the asset under the TFE rules in accordance with subsection 328-180(1) of the ITAA 1997 and section 328-181 of the IT(TP)A 1997 in the 20YY-YY income year.

In the 20YY-YY income year, a balancing adjustment event occurred to the old asset because you stopped holding it by trading in it for X amount in order to acquire a new asset. Unlike the new asset, which is eligible to enter the general small business pool under subsection 328-185(4) of the ITAA 1997, the application of TFE rules prevents the old asset from being pooled with the new asset according to subsection 328-185(1) of the ITAA 1997.

Therefore, in accordance with subsection 328-215(4) of the ITAA 1997, you need to include the termination value of X amount, which is the market value of the asset at disposal, in your assessable income for the 20YY-YY income year.