Question

1 (Disposal of depreciating assets)

Required: The following are all resident taxpayers. In each case, calculate the deduction available for decline in value as well as any assessable income (if any) arising from the disposals during the 2017/18 tax year.

1) Hannah sold equipment from her factory on 31 May 2018 for $9,200. The equipment had originally cost $11,000 and was depreciated using the prime cost method using an effective life of 5 years. The opening adjustable value was $6,000 on 1 July 2017. Decline in value on Hannah's other assets was $1,700.

2) Joe sold office equipment from his law practice on 1 November 2017 for $600.The office equipment had an original cost of $1,800 but was added to the low value pool in 2015 when it became a low value asset. The low value pool had an opening balance of $3,500 and there were no additions to the pool during the year.

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Answer 1

1. When depreciating asset is disposed, there is need to make a balancing adjustment to take into account the difference between it's adjustable value (written down value) and it's termination value. The balancing adjustment will either be included in assessable income or claimed as deduction

- If termination value of asset is more than it's adjustable value, include the difference in assessable income.

- If termination value of asset is less than it's adjustable value, entitled to deduction for difference.

1. Hannah sold equipment, hence termination value - adjustable value =assessable income.

$9200 - $ 6000= $3200 assessable income

2. Decline in value of other asset will be allowed as deduction provided used for business. Assumed to be used for business hence decline in value of $1700 allowed as deduction.

2. Under low value pool of asset ,termination value of any low value asset is deducted from remaining balance of low value pool asset , hence sale of office equipment (assume to be fully used for business) of $600 is deducted from opening balance of $3500.

Note : It is assumed that asset given in question is totally used for taxable purpose