Hello all,
My question relates to information contained on the following ATO page:
Specifically, in relation to this section about CGT for depreciating assets:
"Depreciating asset not in a low-value pool
If your depreciating asset is not a pooled asset, you calculate a capital gain as follows:
You calculate the capital loss as follows:
In these formulas:
- 'sum of reductions' is the sum of the reductions in your deductions for the asset's decline in value that is attributable to your use of the asset, or you having it installed ready for use, for a non-taxable purpose
- 'total decline' is the decline in value of the depreciating asset since you started to hold it.
Example: Capital gain on depreciating asset
Larry bought a truck in August 2016 for $5,000 and sold it in June 2018 for $7,000. He used the truck 10% of the time for private purposes. The decline in value of the truck up to the date of sale was $2,000.
The sum of his reductions relating to his private use is $200 (10% of $2,000). Larry calculates his capital gain from CGT event K7 as follows:
- ($7,000 − $5,000) × (200 ÷ 2,000)
- = $2,000 × 0.1
- = $200
Capital gain from CGT event K7 = $200 (before applying any discount).
Larry isn't registered for GST, so the elements of the cost base are not reduced by the amount of any GST input tax credits included in the cost."
Question:
In the above example, which is on the ATO website, they list the cost as $5000 and termination value as $7000.
In relation to the cost, this is the original purchase price of the truck (disregarding the $2000 in deductions obtained through depreciation). That is, the cost, as outlined above, has not taken into account the fact the person has already deducted $2000 (through depreciation).
My question is:
Why hasn’t the cost been adjusted to account for deductions already obtained (that is, the $2000 already deducted on account of deprecation). My understanding is deductions obtained are generally excluded from the cost/cost base, to account for the fact the person has already obtained a deduction from the ATO. Subsequently the cost should be reduced from $5000 to $3000 to account for this (the adjustable value to account for deductions already obtained).
My understanding was that based on the above example, contrary to what is stated on the ATO website, the person would liable for the following:
Balancing Adjustment
$3,600 in assessable income, by way of a balancing adjustment amount (based on balancing adjustment event for a depreciating asset used 90% of the time for a taxable purpose). Or in other words, 90% of the termination value of $7000 minus the adjustable value (cost) of $3000.
Capital Gains Tax
$400 in capital gains tax, being 10% of $4000 ($7000 termination value minus cost of $3000, which is the adjustable value/cost to account for deductions already obtained).
---
The example provided by the ATO does not make sense to me and seemingly disregards the deductions already obtained. This is strange to me as it seemingly results in the person being under taxed. That is, it doesn’t take into account the deductions obtained at all, overinflating the cost and totally disregarding the deductions for depreciation.
I am hoping there is someone out there who can explain why the example completely excludes the deductions from the cost/cost base.
From a logical standpoint, the person should be liable for $400 in capital gains tax (for private use) and not $200. Likewise, they should be liable for $3600 by way of a balancing adjustment (for taxable use), not $1800.
If the above ATO example is correct, and you disregard the $2000 worth of deductions when calculating the cost/cost base of the asset, this results in the ATO collecting (net) no revenue from this sale. That is, the $2000 in deductions originally claimed in deprecation are merely re-assessed as income by way of $1800 balancing adjustment amount (for 90% relating to taxable purpose) and $200 capital gain (10% relating to private use). This can’t be right? Especially considering the sale price of $7000.
The total amount which has to be assessed is $4000, being the termination value ($7000) minus the adjusted value/cost of $3000 ($5000-$2000). Only this will result in the ATO collecting revenue based on the sale price of $7000.
Confused… please help. I can only assume there is some ruling which states you don’t have to adjust the cost/cost base to account for deductions claimed on motor vehicles, but then this results in no revenue to the ATO. Surely this can’t be right.
Why does the ATO always provide the worst examples and never fully detail their reasoning.
