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Balancing Adjustment Offsetting

Other than for involuntary disposals and disposals made on or after 21 September 1999, this offsetting function is only available to small business taxpayers using the simplified depreciation rules.

A balancing adjustment offset is available for plant compulsorily acquired, lost or destroyed after the introduction of the Uniform Capital Allowances (UCA) rules.

What happens if you no longer hold or use a Depreciating Asset?

If you cease to hold or to use a depreciating asset, a balancing adjustment event may occur. If there is a balancing adjustment event, you need to calculate a balancing adjustment amount to include in your assessable income or to claim as a deduction.

A balancing adjustment event occurs for a depreciating asset when:

  • you stop holding it – for example, if the asset is sold, lost or destroyed

  • you stop using it and expect never to use it again

  • you stop having it installed ready for use and you expect never to install it ready for use again

  • you have not used it and decide never to use it, or

  • a change occurs in the holding or interests in an asset which was or is to become a partnership asset.

A balancing adjustment event does not occur just because a depreciating asset is split or merged.

However, a balancing adjustment event does occur if you stop holding part of a depreciating asset.

Expenses of a balancing adjustment event (such as advertising or commission expenses) may be included in the second element of the cost of the depreciating asset.

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

If the termination value is greater than the adjustable value, you include the excess in your assessable income.

If the termination value is less than the adjustable value, you can deduct the difference.

For the Guide to depreciating assets refer to Depreciating assets and CGT on the ATO website.

Situations where general balancing adjustment rules do not apply:

  • If a depreciating asset has been partly used for other than a taxable purpose, the balancing adjustment amount is reduced to reflect only the taxable use. Additionally, a capital gain or capital loss can arise to the extent of the use for other than a taxable purpose.

  • Similarly, if the depreciating asset is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced, the balancing adjustment amount is reduced and a capital gain or capital loss can arise.

  • There are special balancing adjustment rules for cars.

  • A balancing adjustment event for a depreciating asset in a low-value or common-rate pool or for which expenditure has been allocated to a software development pool is dealt with under specific rules for those pools.

  • If the disposal of a depreciating asset is involuntary, you may be able to offset an assessable balancing adjustment amount.

  • Rollover relief may apply to the disposal of a depreciating asset in certain circumstances, such as where an asset is transferred between spouses pursuant to a court order following a marriage breakdown.

  • There are no specific balancing adjustment rules for some primary production depreciating assets or certain depreciating assets used for landcare operations, electricity connections or telephone lines. However, such assets may be considered part of land for capital gains tax purposes.

  • There are special balancing adjustment rules for depreciating assets used in carrying on research and development activities. Refer to the Research and development tax concession schedule instructions for the current income year for more information.

  • A GST liability will generally occur when a depreciating asset is disposed of by a GST registered entity. The ATO has provided on its website a fact sheet GST and the Disposal of capital assets (NAT 7682-11.2004), for more information.

The legislation has the effect of:

  • removing the option to offset any assessable balancing adjustment amount against replacement plant for balancing adjustment events occurring after 11.45 a.m. AEST on 21 September 1999 (time of announcement) for all taxpayers, with the exception of small business taxpayers; and

  • providing a new balancing adjustment offset that is to be made available for certain involuntary disposals of plant occurring after the time of announcement (broadly, where CGT roll-over relief for involuntary disposals was previously available).

Maintaining the balancing adjustment offset for small business taxpayers was an interim measure until 1 July 2001.

Division 42 of the ITAA 1997 (depreciation of plant) permitted a taxpayer who had disposed of depreciable plant for an amount that exceeded its depreciated value to elect to offset any assessable balancing adjustment amount against the cost or written-down value of replacement or other plant.

The balancing adjustment offset gave greatest benefit to taxpayers who held plant for which depreciation allowances are significantly accelerated and for which there was an active second-hand market. Such taxpayers obtained a significant benefit from the further tax deferral inherent in the offset mechanism. Taxpayers with assets where there was less acceleration of depreciation or no ready second-hand market obtained little advantage comparatively.

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