What happens if you no longer hold or use a depreciating asset?

Find out what happens if you no longer hold or use a depreciating asset.

No longer hold or use a depreciating asset

If you cease to hold or 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
• 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; see Split or merged depreciating assets.

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 (unless you stop holding the asset under a non-arm's length arrangement and the termination value is less than the market value at the time you cease to hold it); see Cost of a 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; see Termination value.

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.

 

There are situations where these general balancing adjustment rules do not apply:

• If a depreciating asset has been partly used for a non-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 that the depreciating asset was used for a non-taxable purpose; see Depreciating asset used for a non-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; see Leisure facilities and boats.
• If a depreciating asset is a second-hand depreciating asset in your residential rental property and your deductions for the decline in value of that asset have been reduced, the balancing adjustment amount is reduced to account for the proportion you have not been able to deduct. Additionally, a capital gain or a capital loss can arise; see Balancing adjustment rules for second-hand depreciating assets in residential rental properties and Second-hand depreciating assets in residential rental properties.
• There are special balancing adjustment rules for cars; see 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; see Balancing adjustment event for a depreciating asset in a low-value pool and Software development pools.
• If the disposal of a depreciating asset is involuntary, you may be able to offset an assessable balancing adjustment amount; see Involuntary disposal of a depreciating asset.
• The assessment of a balancing adjustment amount for an eligible vessel may be deferred for 2 years where a certificate obtained under the Shipping Reform (Tax Incentives) Act 2012 applied to that vessel on the day of the balancing adjustment event. Additionally, rollover relief on the deferred amount may be available.
• 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; see Rollover relief.
• Rollover relief may also apply to interest realignment arrangements where the taxpayer's original interest in a mining, quarrying or prospecting right was acquired after 1 July 2001; see Interest realignment arrangements.
• There are no specific balancing adjustment rules for some primary production depreciating assets (see Primary production depreciating assets) or certain depreciating assets used for landcare operations, electricity connections or phone lines (see Landcare operations and Electricity connections and phone lines). However, such assets may be considered part of land for capital gains tax (CGT) purposes.

There are special balancing adjustment rules for depreciating assets used in carrying on research and development activities; for more information see Research and development tax incentive schedule instructions 2023.

A balancing adjustment event may occur in an income year after you claimed temporary full expensing for a depreciating asset, on either the cost of acquisition or of improvements. If so, you need to calculate a balancing adjustment amount.

Any non-taxable use of an asset in an income year after 2022–23, the year in which temporary full expensing was claimed, does not reduce balancing adjustment amounts for balancing adjustment events happening after 2022–23.

For more information, see Balancing adjustment event.

A special balancing adjustment event will also occur in an income year after the year in which temporary full expensing has been claimed when:

• it is no longer reasonable to conclude that you will use the depreciating asset principally in Australia for the principal purpose of carrying on a business, or
• it becomes reasonable to conclude that the depreciating asset will never be located in Australia.

This special balancing adjustment event is not triggered if you use the simplified depreciation rules, other than for those depreciating assets that are excluded from the simplified depreciation rules. For those other depreciating assets, the event may still be triggered if temporary full expensing has been claimed for that asset.

If this special balancing adjustment event is triggered:

• you are treated as though you ceased to hold the asset and the termination value of the asset is equal to its market value at that time, resulting in the temporary full expensing deduction being clawed back to the asset's market value at that time, and
• the first element of cost is modified so that the first element of cost of the asset is the asset’s termination value at the time of the event, such that though you may not thereafter work out the decline in value for that asset using temporary full expensing, you might, in a later income year, be entitled to claim other capital allowances that you are entitled to for that asset (for example, under the general capital allowances rules for the proportion of business use). You may not claim a deduction for the asset under the general capital allowance rules in the same income year as the special balancing adjustment event.

A GST liability will generally occur when a depreciating asset is disposed of by a GST registered entity. For more information, see GST and the disposal of capital assets.

Termination value

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 (such as goods or services) you receive for the asset.

The most common example of termination value is the proceeds from selling an asset. The termination value may also be an insurance payout for the loss or destruction of a depreciating asset.

The termination value is reduced by the GST payable if the balancing adjustment event is a taxable supply. It can be modified by increasing or decreasing adjustments.

If the termination value is taken to be the market value of the asset (for example, in the case of assets disposed of under a private or domestic arrangement), the market value is reduced by any input tax credit to which you would be entitled had you acquired the asset solely for a creditable purpose.

An amount is not an assessable recoupment if it is included in the termination value of a depreciating asset; see Recoupment of cost.

There are special rules to work out the termination value of depreciating assets in certain circumstances. Some of the more common cases are covered below. If you are not sure of the termination value of a depreciating asset, contact us or your recognised tax adviser.

Non-arm's length and private or domestic arrangements

The termination value of a depreciating asset is its market value just before you stopped holding it where:

• the termination value would otherwise be less than market value and you did not deal at arm’s length with another party to the transaction, or
• you stopped holding the asset as a result of a private or domestic arrangement (for instance, you gave the asset to a family member).

Selling a depreciating asset with other property

If you received an amount for the sale of several items that include a depreciating asset, you need to apportion the amount received between the termination value of the depreciating asset and the other items. The termination value is only that part of what you received that is reasonably attributable to the asset.

Apportionment on the basis of the market values of the various items for which the amount is received will be acceptable.

Depreciating asset you stop using or never use

The termination value of a unit of in-house software you still hold but:

• stop using and expect never to use again, or
• decide never to use

is zero. See In-house software.

For any other asset, if you stop using it 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.

Death of the holder

If a person dies, and a depreciating asset starts to be held by their legal personal representative (such as the executor of their estate), a balancing adjustment event occurs. The termination value of the asset is its adjustable value on the day the holder died. If they had allocated the asset to a low-value pool, the termination value is the amount of the closing balance of the pool for the income year in which the holder died that is reasonably attributable to the asset; see Low-value pools.

If the asset passes directly to a beneficiary of their estate or to a surviving joint tenant, the termination value is the asset’s market value on the day the holder died.

Depreciating asset used for a non-taxable purpose

If a depreciating asset is used both for a taxable purpose and for a non-taxable purpose, the balancing adjustment amount must be reduced by the amount that is attributable to the use for a non-taxable purpose. In addition, a capital gain or capital loss may arise under the capital gain and capital loss provisions. The amount of the capital gain or capital loss is the difference between the asset’s cost and its termination value that is attributable to the use for a non-taxable purpose.

For depreciating assets that are used wholly for a non-taxable purpose, the balancing adjustment amount is reduced to zero. The difference between the asset’s termination value and its cost can be a capital gain or capital loss.

For some depreciating assets, any capital gain or capital loss arising will be disregarded even though the asset is used for a non-taxable purpose. These assets include:

• cars that are designed to carry a load of less than one tonne and fewer than 9 passengers
• motorcycles
• valour or brave conduct decorations awarded
• a collectable (such as a painting or an antique) if the first element of its cost is $500 or less
• assets for which you can deduct an amount for the decline in value as a small business entity under the simplified depreciation rules for the income year in which the balancing adjustment event occurred
• assets acquired before 20 September 1985
• assets used solely to produce exempt income.

In addition, a capital gain arising from the disposal of a personal use asset (an asset used or kept mainly for personal use or enjoyment) of which the first element of cost is $10,000 or less is disregarded for CGT purposes. A capital loss arising from the disposal of any personal use asset is also disregarded for CGT purposes.

Leisure facilities and boats

If a balancing adjustment event occurs for a depreciating asset that is a leisure facility or a boat and your deductions for the decline in value of the asset have been reduced (see Decline in value of leisure facilities and Decline in value of boats) the balancing adjustment amount is reduced to the extent your deductions for decline in value were reduced. In addition, a capital gain or capital loss may arise in respect of the difference between the asset’s cost and its termination value that is attributable to the reduction.

These rules are similar to those for working out the balancing adjustment amount for a depreciating asset used for a non-taxable purpose.

Balancing adjustment rules for second-hand depreciating assets in residential rental properties

If a depreciating asset is a second-hand depreciating asset in your residential rental property and your deductions for the decline in value of that asset have been reduced, the balancing adjustment amount must be reduced to account for the proportion you have not been able to deduct. In addition, a capital gain or a capital loss may arise under the capital gain or capital loss provisions.

These rules are similar to those for working out the balancing adjustment amount for a depreciating asset used for a non-taxable purpose.

For more information, see Rental properties 2023.

Plant acquired before 21 September 1999 and other depreciating assets acquired before 1 July 2001

Any assessable balancing adjustment amount or capital gain (if the asset was used for a non-taxable purpose) may be reduced if a balancing adjustment event occurs for:

• an item of plant that was acquired before 11:45am AEST on 21 September 1999, or
• a depreciating asset acquired before 1 July 2001 that is not plant.

The amount of the reduction is the cost base of the asset for CGT purposes less its cost. The purpose of this reduction is to preserve CGT cost base advantages for assets acquired before these dates.

One reason that the cost base might exceed the cost is indexation of the cost base. There is indexation of the cost base to 30 September 1999 where:

• a CGT event happens to an asset acquired before 1145am AEST on 21 September 1999, and
• the asset was owned for 12 months or more.

Indexation is not available for assets for which capital gains and capital losses are disregarded; for a list of such assets, see Depreciating asset used for a non-taxable purpose.

However, the balancing adjustment amount is reduced if the asset is:

• a car that is designed to carry a load of less than one tonne and fewer than 9 passengers
• a motor cycle
• a valour decoration
• a collectable (such as a painting or an antique) if the first element of its cost is $500 or less
• an asset acquired before 20 September 1985, or
• an asset used solely to produce exempt income.

In these cases, the balancing adjustment amount is reduced by the difference between the asset’s termination value and its cost that is attributable to the use of the asset for a taxable purpose.

For more information about indexation of a cost base and the impact of indexation on discount capital gains, see Guide to capital gains tax 2023.

Balancing adjustment rules for cars

If a balancing adjustment event occurs for your car, you need to work out any balancing adjustment amount. Special rules apply to the calculation of balancing adjustment amounts for cars.

If a balancing adjustment event occurs for a car you used for a non-taxable purpose, you disregard any capital gain or capital loss.

From 1 July 2015, there are only 2 methods of calculating work-related car expenses. You may choose the method which in your view, best captures the running costs of your vehicle. The methods are:

• the cents per kilometre method
• the logbook method.

For 2022–23, the cents per kilometre method:

• applies for up to 5,000 business kilometres travelled
• has a rate of 78 cents per kilometre for cars. (We review the rate at the start of each income year.)

If you use the logbook method of claiming car expenses, your balancing adjustment amount needs to be reduced by the amount that is attributable to the use of the car for a non-taxable purpose.

If you have only used the cents per kilometre method of claiming car expenses, no balancing adjustment amount arises. This is because the decline in value of the car is already taken into account as part of the calculation of the car expenses.

However, you may need to include a balancing adjustment amount in your assessable income or claim a deduction in relation to that amount for a balancing adjustment event, which occurs at or after the start of 2022–23 if:

• you switched between the cents per kilometre method and the logbook method of claiming car expenses before 1 July 2022
• you owned a car before 1 July 2015 and you used the former 'one third of actual expenses' method or the '12% of original value' method for claiming car expense deductions for one or more years.

If you switched from the '12% of original value' method to the 'cents per kilometre' method, you will not need to make a balancing adjustment.

The above circumstances are only expected to occur in a limited number of cases. If you are affected and you are unsure of how to work out your balancing adjustment amount, contact us or your recognised tax adviser.

For a car subject to the car limit (see Car limit) you need to reduce the termination value. You multiply the termination value by the following fraction:

(car limit + amounts included in the car's second element of cost) ÷ total cost of car

where the total cost of the car is the sum of the first and second elements of cost, ignoring the car limit and after any adjustments for input tax credits; see GST input tax credits. You use the reduced termination value to work out your balancing adjustment amount for the car.

If a car was acquired at a discount and the cost of the car was increased by a discount portion, the termination value of the car must also be increased by that discount portion; see Car acquired at a discount.

If you are a lessee under a luxury car lease or a hirer under a hire purchase agreement and you do not acquire the car when the lease or agreement terminates or ends, you are treated as if you had sold the asset to the lessor or financier, respectively. You will need to work out any assessable or deductible balancing adjustment amount.

Involuntary disposal of a depreciating asset

An involuntary disposal occurs if a depreciating asset is:

• lost or destroyed
• compulsorily acquired by an Australian government agency
• compulsorily acquired by another entity (other than a foreign government agency)
• disposed of to an entity (other than a foreign government agency) after they served a notice on you inviting you to negotiate a sale agreement. They must have informed you that, if negotiations are unsuccessful, the asset will be compulsorily acquired either under an Australian law, other than chapter 6A of the Corporations Act 2001 or under a foreign law, other than the equivalent of chapter 6A of the Corporations Act 2001
• fixed to land that is disposed of to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land and the lease significantly affected (or would have significantly affected) your use of the land, and the entity to which you disposed of the land is the lessee.

You may offset an assessable balancing adjustment amount arising from an involuntary disposal against the cost of one or more replacement assets. If you offset an amount against the cost of a replacement asset for an income year after the one in which the replacement asset’s start time occurs, you must also reduce the sum of its opening adjustable value plus any second elements of its cost for that later year.

You must incur the expenditure on the replacement asset, or start to hold it, no earlier than one year before the involuntary disposal and no later than one year after the end of the income year in which that disposal occurred.

The Commissioner can agree to extend the time limit, for example, if it is unlikely that insurance claims for the disposal of the original asset will be settled within the required time even though you have taken all reasonable steps to have the insurance claims settled.

To offset the assessable balancing adjustment amount, the replacement asset must be wholly used, or installed ready for use, by you for a taxable purpose at the end of the income year in which you incurred the expenditure on the asset or you started to hold it, and you must be able to deduct an amount for it.

Rollover relief

If rollover relief is available under UCA, no balancing adjustment amount arises when a balancing adjustment event occurs for a depreciating asset. In some cases, rollover relief is automatic, for example, transfers pursuant to a court order following a marriage breakdown.

In some cases, rollover relief must be chosen. If the event arises from a change in the holding of, or in interests in, a partnership asset such as a variation in the constitution of a partnership or in a partnership interest, the transferor and the transferee must jointly choose the rollover relief.

Rollover relief may be available if you cease to hold a vessel covered by a certificate issued under Part 2 of the Shipping Reform (Tax Incentives) Act 2012. If the available relief is chosen, only the balancing adjustment amount that exceeds the cost of acquiring another certified vessel is included in assessable income.

When rollover relief applies, the transferee of the depreciating asset can claim deductions for the asset’s decline in value as if there had been no change in holding.

The transferee must use the same method that the transferor used to work out the decline in value of the asset.

If the transferor used the diminishing value method, the transferee must also use the same effective life that the transferor was using.

If the transferor used the prime cost method, the transferee must replace the asset’s effective life in the prime cost formula with the asset’s remaining effective life, that is, any period of the asset’s effective life that is yet to elapse when the transferor stopped holding the asset.

The first element of cost for the transferee is the adjustable value of the asset when it was held by the transferor just before the balancing adjustment event occurred.

There are specific record-keeping requirements for rollover relief; see Record keeping for rollover relief.

The roll-over relief under UCA has been available since 1 July 2007 to small business entities that choose to claim their capital allowance deductions under the simplified depreciation rules; see Small business entity concessions.

Interest realignment arrangements

You may choose to apply rollover relief to interest realignment arrangements where the taxpayer's original interest in the mining, quarrying or prospecting right was acquired after 1 July 2001. An interest realignment arrangement is an arrangement that involves 2 or more parties that each hold mining, quarrying or prospecting rights that relate to a common development project the parties propose to undertake jointly. The effect of the arrangement must be to align the interests that each party has in each right with their interest in the common development project.

If the available relief is chosen, the effect of the rollover is that a standard balancing adjustment does not occur. The adjustable value of the taxpayer's original right disposed of under the arrangement is transferred to the cost of the new right the same taxpayer received.

Limited recourse debt arrangements

Include excessive deductions for capital allowances as assessable income if expenditure on a depreciating asset is financed or refinanced wholly or partly by limited recourse debt (including a notional loan under certain hire purchase or instalment sale agreements of goods). This will occur where the limited recourse debt terminates but has not been paid in full by the debtor. Because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply to work out whether the debt has been fully paid.

If you are not sure what constitutes a limited recourse debt or how to work out your adjustment to assessable income, contact us or your recognised tax adviser.

Split or merged depreciating assets

If you hold a depreciating asset that is split into 2 or more assets, or a depreciating asset that is merged into another depreciating asset, you are taken to have stopped holding the original depreciating asset and to have started holding the split or merged asset. However, a balancing adjustment event does not occur just because depreciating assets are split or merged.

For example, removing a CB radio from a truck splits a depreciating asset. If you install the radio in another truck you may be merging the 2 assets (radio and truck).

After depreciating assets are split or merged, each new asset must satisfy the definition of a depreciating asset if UCA are to apply to it. For each depreciating asset you start to hold, you need to establish the effective life and cost.

The first element of cost for each of the split or merged depreciating assets is:

• a reasonable proportion of the adjustable value of the original asset just before the split or merger, and
• the same proportion of any costs of the split or merger.

If a balancing adjustment event occurs to a merged or split depreciating asset (for example, if it is sold) the balancing adjustment amount is reduced:

• to the extent the asset has been used for a non-taxable purpose
• by any amount of the original depreciating asset that is reasonably attributable to use for a non-taxable purpose of the original depreciating asset before the split or merger.

This reduction is not required if the depreciating asset is mining, quarrying or prospecting rights or information, provided certain activity tests are satisfied.

Foreign currency gains and losses

If you sell a depreciating asset in foreign currency, the termination value of the asset is converted to Australian currency at the exchange rate applicable when you stopped holding the asset. Under the forex provisions, you may make a foreign currency gain or loss if the Australian dollar value of the foreign currency when received differs from the Australian dollar value of the termination value. Any realised foreign currency gain or loss on the transaction is included in assessable income or allowed as a deduction, respectively.

If the TOFA rules apply to you, then the method that you use to calculate your foreign currency gain or loss may differ.

For more information about the TOFA rules, see Guide to the taxation of financial arrangements (TOFA).

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