Assets and depreciation
Balancing adjustment
A balancing adjustment is the income tax adjustment made when a depreciating asset is sold, lost or stops being used, comparing what you received with the asset's remaining tax value.
A balancing adjustment event happens when you stop holding a depreciating asset, for example by selling it, scrapping it, losing it, or when you stop using it for a taxable purpose. At that point the tax system checks whether the deductions you claimed matched the real decline in value, and corrects the difference through an assessable amount or a deduction.
The calculation compares two figures. One is the asset's termination value, which is generally the amount you receive on sale, or an insurance payout, or its market value in some cases. The other is the asset's adjustable value, which is its cost less the decline in value you have already deducted. If the termination value is higher, the excess is generally included in assessable income. If it is lower, the shortfall is generally deductible.
Part-private use is accounted for. If you used the asset partly for private purposes, only the taxable purpose portion of the balancing adjustment is included or deducted. Records of the asset's cost, the method used, and the dates are what allow you to complete the calculation, so an asset register is valuable.
There are some exceptions and special rules. Assets in a small business pool are not treated this way, since disposal proceeds are simply taken off the pool balance. Rollover relief is available in some cases, such as certain business restructures. There are also rules for a small business that has chosen to use simplified depreciation and then leaves it.
GST follows its own track. If you are registered for GST and sell a business asset, the sale is generally a taxable supply, so you must include GST of one eleventh of the price in your BAS, even if the sale produces an income tax loss. If the asset was used only partly for business, you may need to account for GST on only the creditable portion. The income tax balancing adjustment is reported in your tax return, not on the BAS.
A common mistake is forgetting to account for the sale of a fully depreciated asset, where the entire proceeds are usually assessable. Another is forgetting GST on the sale. This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A registered business sells a delivery trailer for $5,500 including GST. GST on the sale is $5,500 / 11 = $500, so the termination value is $5,000. The trailer's adjustable value is $3,200 after depreciation. Balancing adjustment is $5,000 - $3,200 = $1,800, which is generally assessable income. The $500 GST is reported on the BAS for the period of sale.
Practical tips
- Keep an asset register showing cost and deductions claimed so you can work out the adjustable value when you sell.
- Remember to charge and report GST on the sale of a business asset if you are registered.
- Pooled assets are treated differently, so check which regime applies before calculating.