Balancing adjustments on sale of business assets 043-03070040

If an asset is disposed of (sold) by a business, a decision must be made as to whether an adjustment should be made to the assessable income (assessed from the business) for social security Income Test purposes.

Any requests for adjustments of income from controlled private trusts or companies must be referred to the Complex Assessment Officer (CAO) who will do the assessment and determine the attribution to the customer.

If an asset is disposed of, or sold for less than its written down value (WDV) in the depreciation schedule, a loss on disposal will have occurred. Similarly, if an asset is disposed of for more than the WDV in the depreciation schedule, a profit on disposal will have occurred. The amount of the profit or loss on the sale of a depreciated asset is taken into account when determining the overall profit of a business for tax purposes.

For social security Income Test purposes the profit on the sale of a depreciated asset is regarded as assessable income. Similarly a loss on the sale of a depreciated asset is regarded as an allowable deduction from other income earned by the business.

The principle of 'striking the current rate of income' must be kept in mind in deciding whether to include this profit or loss, on the sale of a depreciated asset, when calculating the assessable income of a customer involved in a sole trader or partnership business. If the sale of a particular item of depreciated asset is not part of the normal cycle of activity undertaken by the business (i.e. such a sale occurs only every few years) then the profit or loss derived from the sale is not indicative of the current rate of income earned by the customer from the business. In this situation the profit or loss from the sale would not be taken into account when determining the current rate of assessable income to be maintained from the business.

If, however, the sale of a particular item of depreciated asset occurs on a regular basis (that is, every year) then the profit or loss derived from such a sale would be taken into account when determining the current rate of assessable income from the business.

If an asset that has not been depreciated is sold (for example, real estate), and the price obtained exceeds the original purchase price, a capital gain would have occurred. This amount is not taken into account when determining the current rate of assessable income of the business for social security Income Test purposes, unless such a disposal is part of the normal pattern of activity undertaken by the business.

Similarly, if an asset that has not been depreciated is sold and the price obtained is less than the original purchase price, a capital loss would have occurred. This amount is not taken into account when determining the current rate of assessable income for social security Income Test purposes.