Balancing Adjustment: Motor Vehicles
Extract from ATO:“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.”
Please could you advise on how best to deal with an asset ( typically a motor vehicle) that is used by a sole trader in a business by an employee and one of the following scenarios happens:
1. Vehicle is claimed (80%) Work related for a few years. The vehicle has a NBV of $20,000 but a market value of $32,000.
The vehicle is not sold but is passed over to the wife to drive – totally private kilometres.
Is there a ‘deemed’ disposal – the owner has ceased using it for work related purposes and is unlikely to ever use it again for work related use?
If the vehicle is sold, say 3 years later, it is now disposed of. What are the balancing adjustment implications?
2. Sole Trader uses a Landcruiser in his maintenance business (90% Business). Depreciation claimed and then balance written off under small business provisions. There is now a general Pool with nil value.
Sole Trader is offered employment by one employer, doing the same type of work but as an employee.
The business has not been officially closed – licence and insurance paid but no income.
There are no GST adjustments as vehicle too old.
The vehicle is now used for work related purposes to carry tools to and from work and at times to different work sites. The vehicle remains in the same name but is used for different purposes.
Is there a need for a balancing adjustment?
Any assistance would be greatly appreciated
Assumption we are talking about something that is going to happen this financial year otherwise the $30,000 maybe $20,000. Also assume that your client is a small business taxpayer.
Is there any chance that at the start of the financial year the STS pool balance was below $30,000? In other words there is not much more than the car in it? If so then the pool can be written off giving it the same status as equipment purchased for less than $30,000. This will give an even better result when you sell. The way the formula works in section 326-215, it allows you to, when it is sold, work out the amount of “taxable” use over the whole period of ownership, take that percentage of the sale price and add that back into the pool or include as income. https://www.ato.gov.au/law/view/document?DocID=PAC%2F19970038%2F328-215&PiT=99991231235958
If the asset was one for which you deducted an amount under section 328-180 (about assets costing less than $1,000), you include the * taxable purpose proportion of the asset ‘ s * termination value in your assessable income.
Note the $1,000 is currently replaced with $30,000.
Taxable purpose portion is worked out as an average over the whole time of ownership https://www.ato.gov.au/law/view/document?LocID=%22PAC%2F19970038%2F328-205%22
Certainly change of use of the car does not create a balancing adjustment it just affects the % that the depreciation can be claimed. Which, if you can get it across to immediate write off while it is still 80% business use then you can write off 80% of its value then look 3 years later at the whole use of the car over the whole period of ownership and maybe decide that it was overall used 40% for business 60% private then only 40% of the sale proceeds become income. This is a better outcome than not being able to claim depreciation at all during the time it was 100% used for private. Under the immediate write off you get a bonus deduction for some increased private use.
Similar result for your second point with the land cruiser. No change of ownership no adjustment entry but the use regarding wages income would still be considered a taxable purpose because it is being used to produce income so the percentage of the sale proceeds that needs to be included as income will not reduce so dramatically.
Subject to subsection (8), a taxable purpose is:
(a) the *purpose of producing assessable income; or
(b) the purpose of *exploration or prospecting; or
(c) the purpose of *mining site rehabilitation; or
(d) *environmental protection activities.