If you’ve never heard of the term ‘balancing adjustment’ then you’re not alone. It’s one of the jargon terms accountants use and means very little to clients. However, if you’re in business or claim depreciation on any assets in your tax return, then you should understand the concept.
As your accountants, we understand the over complicated tax rules that govern us every day, so you don’t necessarily have to. We try and break down the tax rules to you in simplified terms. The most effective way we find is to either draw a picture or use an example. In this case, I’m going to use an example.
Let’s say Johns Automotive purchases a hoist in the 2021 financial year to use 100% in the business. The hoist costs $45,000 (excluding GST) and under the instant asset write off rules, John can claim 100% of the hoists cost as a tax deduction in the year of purchase.
Let’s now fast track to the year 2023 where technology has advanced in the car hoist space. There’s now a brilliant new hoist on the market which John decides he must have. He’s got 2 options. Trade in the old hoist on the new hoist or sell the old hoist privately.
Regardless of the choice, John will need to declare any amount he receives (as either a trade in or from a private purchaser) as income and pay tax on this income. As Johns business is also registered for GST, he will need to pay the ATO 1/11 of the sale/trade-in price of the hoist on his next BAS. So why does John need to do this? Because he has claimed the hoist as a tax deduction in full in 2021 ($45,000 tax deduction), the hoist no longer has any value for tax. Therefore, any proceeds he receives on the sale is taxable.
On the flip side of the above, John can claim the purchase price of the new hoist as a tax deduction in full (provided he purchases prior to 30 June 2022) and also claim 1/11 of the purchase price.
So now you know what a balancing adjustment is…..the next lesson is understanding the reasoning of the ATO!