When a small business stops using a depreciating asset for any purpose or the asset has been disposed of, sold, lost, or destroyed, a “balancing adjustment event” has occurred.
The taxable purpose proportion of the termination value must be deducted from the business’s depreciating asset pool balance at the end of the income year. The termination value could be money received from the sale of an asset or insurance payout as the result of the loss or destruction of an asset.
If the disposal is a taxable supply, the termination value must be reduced by the amount of GST payable (except where the termination value is deemed to be the market value of the asset).
If a small business disposes of an asset and the taxable purpose proportion has been changed, then the termination value must also be adjusted. The taxable purpose proportion must be recalculated to reflect the average taxable purpose proportion applied during the income years in which the asset was in a small business pool.
Where an immediate deduction has been claimed for a low-cost asset and it is later disposed of, the ATO requires the taxable purpose proportion of the termination value to be included in assessable income. Where an amount is deducted from the pool balance on disposal of an asset and this results in a negative pool balance, the amount of the balance is treated as assessable income.
An example may help to clarify how this works. Mustafa runs a small business, and during the income year he disposes of the following assets from the general small business pool:
- a computer desk, used 100% in the business and sold for $200, and
- a station wagon, traded in for $10,000 on a new vehicle – the station wagon was used 80% for business purposes, so the taxable purpose proportion of its termination value is $10,000 x 80% = $8,000.
Mustafa must reduce the closing balance of his general small business pool by the taxable purpose proportion of the termination values of the computer desk ($200) and the station wagon ($8,000).
If the closing balance of the pool was $6,000 before deducting the taxable purpose proportion of the termination values of the computer desk and station wagon (the total of which is $8,200), then the pool will have a negative value of $2,200 and this amount will be treated as assessable income.
No capital gains tax liability arises in respect of the disposal of a depreciating asset that has been deducted under the simplified depreciation rules.