Overview of Australian Taxation Functionality
This topical essay gives an overview of the Australian tax legislation pertaining to balancing charges and CGT.
The Oracle Assets Australian taxation functionality gives you a powerful, flexible and easy to use facility for improved control over the allocation of the proceeds of sale. This enhanced functionality will track proceeds through the tax books from the sale of an asset to the application of the surplus against new asset additions and, provides comprehensive reporting on balancing charge allocations and CGT liability. The functionality complies with the Australian tax legislation and accounting conventions.
Basic Business Needs
The Oracle Assets Australian taxation functionality provides you with the features you require to satisfy the following business needs on a monthly, periodic and annual basis:
- You can distribute the balancing charge to accurately account for net proceeds
- The balancing charge is allocated from the "gain" calculated by Oracle Assets according to your depreciation and pro rata conventions at the date of realization
- You can invoke routines to determine which balancing charges have and have not been applied
- Balancing charges may be applied fully against one asset addition or spread over a number of additions
- A history of transactions is available for reconciliation and substantiation
- Complete reporting of all balancing charge transactions is available as standard
- You can maintain a table of CGT Index rates
- You have control over the basis for CGT calculation to give you more accurate reporting of your tax liability
- You can satisfy the Australian Taxation Office substantiation requirements without having to manually track, analyze and investigate each transaction
Major Features
Balancing Charges
With Oracle Assets you can enter proceeds of sale and have the system calculate the gain or loss on the sale automatically. Certain gains on sale can be applied as balancing charges against a new asset.
You can apply a balancing charge to a new asset by selecting the unallocated gains on sale from one or more retired assets. On the application of a balancing charge a cross-reference is established between the retired asset and the new asset.
An audit trail report is available to provide details of all balancing charge allocations. You can print this report on an 'as required' basis to substantiate the balancing charge figures in your tax reports.
The balancing charges applied to new assets acquired in the financial year are shown on a new end of year retirement report.
CGT
Oracle Assets calculates the CGT liability when you retire an asset, taking into account the index rate applicable to the life of the asset.
You can enter a deemed value and date for the asset at the time of retirement and any incidental costs pertaining to that asset.
The CGT report shows the tax liability for all eligible assets retired in the year.
Definitions
Proceeds of Sale
The amount received from the sale of an asset as a gross amount prior to any deductions.
Profit on Sale (Gain)
The amount received from the sale of an asset as a net amount after deducting any amounts for pro rata depreciation, removal expenses and salvage value.
Cost
Asset's purchase or construction cost, customs duty, transportation costs to bring the asset to where it is to be installed, in-transit insurance and installation costs. [Taxation Ruling IT 2197]
Depreciated Value
Cost price less amounts for depreciation allowed or allowable. [Section 62 Income Tax Assessment Act ("ITAA")]
Consideration Receivable
The amount received from an insurance policy on loss or destruction, or the sale proceeds less expenses of sale upon selling of an asset, or market value at disposal date if a separate value cannot be ascribed to an asset - it was gifted, scrapped and so on. [Section 59(3) ITAA]
Plant or Articles
"Asset" and "depreciable asset" are used in this document to refer to what the ITAA refers to as "plant or articles". Plant or Articles are defined according to case law and are not defined in the ITAA except for specific items "included" in the definition of "plant" in Section 54(2) ITAA.
Allocation of Balancing Charges to New Assets
You can allocate all or a portion of the gain on the sale of an asset to a new asset within the year of purchase of the new asset.
This is achieved using the allocate balancing charge form which is invoked for a selected new asset. You can retrieve the unallocated gains from one or more retired assets, select all or a portion of the unallocated amounts and, allocate that amount as a balancing charge against the selected new asset.
You may retrieve the unallocated amounts by asset ID, partial asset ID or by category. The selected assets are presented in the sequence of retirement, with the latest first.
To comply with the Australian tax rules you should allocate the balancing charges successively to:
- Units of property acquired as replacement assets during the year of income
- Other units of property acquired during the year of income
Unallocated amounts for retired assets are available for application as balancing charges up to the end of the financial year, two years after the year of retirement of the asset.
Australian Taxation Reporting
The Tax Retirement report for all assets shows information relating to the gain or loss on retirement by detailing both assessable and non-assessable amounts and unadjusted CGT. This report can be run selectively by category and period.
Balancing Charges
You can view unallocated asset gain amounts by running the Calculated Balancing Charge report. The report can be selected by category and shows all balancing charges calculated, their status and outstanding balances.
You should run the Australian Tax Depreciation Schedule on a regular basis and, as a requirement, at the end of the financial year. This report shows the details of all assets, including those acquired during the financial year, any balancing charges applied and the written down value of the assets at the end of the year. You should run this report after the end of year depreciation run.
The Balancing Charge Allocations report lists the details of balancing charge allocations made during the financial year. This report is printed in the sequence of asset number for all assets to which a balancing charge was allocated in the year and shows details of the amount applied and the retired assets from which it was applied. Totals of the balancing charges applied and of the effect on the financial year tax book for the current and previous years are provided.
The Taxation Retirement report for depreciable assets shows details of all assets retired in the defined period. For each asset, the report shows the amount of calculated balancing charge applied against replacement assets and the amount unapplied and, thus, assessable as income.
CGT
All asset retirements in a defined period can be listed on the Capital Gains Tax report which is designed to show the capital gains and capital losses which have accrued during a tax year. The report shows both CGT affected and non-CGT affected assets.
Relevant Australian Tax Legislation
The following text is designed to
- Concisely summarize Australian taxation legislation (ITAA) as it applies to the calculation and application of taxation balancing charges and in the calculation and application of the capital gains provisions of the Act
- Present examples which illustrate the operation of balancing charges and capital gains and which show the impact on the calculation of depreciation, gains and losses
Scope
This document is limited to specifying the required functionality in respect of the application of the balancing charge provisions of the Act [Section 59 ITAA] and the application of the capital gains provisions of the Act [Part IIIA ITAA]. This functionality assumes that this legislation applies only to "tax books" in Oracle assets and to a company which uses its assets completely for business use. Therefore, no personal use assets or assets which have a private use component are assumed to exist and are considered to be beyond the scope of this functional requirement.
The scope of this functional requirement also excludes:
- The operation of other sections of the Act such as Section 25 (General Income Provisions), Section 26AAA (Capital Profit on Sale of Property), Section 26AAB (Profit on Sale of Leased Vehicle), Section 57AF (Luxury Motor Vehicle Depreciation Cost Limit) and special depreciation and write-off provisions relating to primary producers and mining/exploration companies.
- Functionality providing for the carry forward of capital losses and the application of balancing charges against the tax depreciated values of existing assets. Not carrying forward capital losses recognizes that the CGT calculations may be subject to manual re-calculation and that the scope of CGT goes beyond the fixed asset register. Not providing for the application of balancing charges against existing assets recognizes that this functionality is rarely, if ever, used.
- Tax effect accounting issues arising from the calculation and application of balancing charges and capital gains or losses.
- Implications resulting from other non-taxation related fixed asset issues are also beyond the scope of this functional requirement.
- Mass additions in Oracle Assets. Mass additions operate by updating one set of books only (the "corporate" book). The "corporate" book which has been updated should then be copied to other sets of books as required, such as to a taxation book.
These assumptions help to simplify the application of this legislation in Oracle Assets and, therefore, help to keep Oracle Assets efficient, easy to use and to maintain.
Review of the Relevant Taxation Legislation
The taxation legislation pertaining to the calculation and application of balancing charges is summarized diagrammatically below.
Figure 5 - 1. Disposal of depreciable asset
Figure 5 - 2. Disposal of non-depreciable asset
The major features in the operation of the CGT taxation provisions are summarized diagrammatically below.
Figure 5 - 3. Capital gains
Balancing Charge
A deduction is available for depreciation on property which qualifies as "plant or articles" and which is used or installed ready for use during the income year for the purpose of producing assessable income. [Section 54(1) ITAA]
When an item of plant or articles (depreciable asset) is disposed of during an income year, its disposal may give rise to a balancing adjustment in that year in respect of depreciation [Section 59 ITAA]. The balancing adjustment may be:
- An allowable deduction (loss on disposal) in the year of income
- Included in assessable income (gain on disposal) in the year of income
No balancing adjustment may arise if the consideration receivable is equal to the asset's depreciated or written down value.
Balancing Adjustment Giving Rise to an Allowable Deduction
(Loss on Disposal)
"Where any property of a tax-payer, in respect of which depreciation has been allowed or is allowable ... , is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction." [Section 59(1) ITAA]
That is, the depreciated value is ascertained and is compared with the amount of consideration receivable on disposal. If the depreciated value exceeds the amount of such consideration so that effectively insufficient depreciation has been allowed, a further deduction of the excess of the depreciated value over the consideration receivable is allowable. It is akin to claiming additional depreciation in the year of the disposal.
Example 1
A loss on disposal of a depreciable asset.
- Depreciated using the prime cost method at 10% per annum
- Accumulated depreciation $6,000 ($2,000 pa x 3 years)
- Written down value $14,000
| Cost
| $20,000
|
| Accumulated depreciation
| ($6,000)
|
| Depreciated value
| $14,000
|
| Selling price
| $12,000
|
| Allowable deduction
| ($2,000)
|
Balancing Adjustment Giving Rise to Assessable Income
(Gain on Disposal)
"If that consideration exceeds the depreciated value, the excess, to the extent of the sum of the amounts allowed and allowable in assessments for income tax ... in respect of depreciation, shall, subject to the succeeding provisions of this section, be included in ..." the company's "... assessable income of that year." [Section 59(2) ITAA]
That is, if the consideration receivable exceeds the depreciated value so that an excessive amount of depreciation has been allowed, such excess (the "balancing charge") is assessable to the extent of the total amounts of depreciation allowed or allowable in the assessments. It is seen as a recoupment of depreciation previously claimed.
If the consideration receivable exceeds the original cost, the excess profit is not assessable as a balancing charge. The excess may be assessable as income under Section 25 ITAA (that is, a sale in the ordinary course of business or in a profit making scheme), or under part IIIA of the ITAA (CGT provisions) as a capital gain. Generally, a capital gain arises if:
- the asset is disposed after 19 September 1985 and the consideration receivable exceeds the indexed cost base of the asset or,
- the asset was disposed within 12 months of its acquisition, and the consideration receivable exceeds the unindexed cost base of the asset. [Sections 160ZA(4), S160ZK ITAA]
Example 2
A gain on disposal of a depreciable asset.
- Depreciated using the prime cost method at 10% per annum
- Accumulated depreciation $6,000 (three years)
- Written down value $14,000
| Cost
| $20,000
|
| Accumulated depreciation
| ($6,000)
|
| Depreciated value
| $14,000
|
| Selling price
| $18,000
|
| Assessable income
| ($4,000)
|
Example 3
A gain in excess of cost on disposal of a depreciable asset.
- Depreciated using the prime cost method at 10% per annum
- Accumulated depreciation $6,000 (three years)
- Written down value $14,000
| Cost
| $20,000
|
| Accumulated depreciation
| ($6,000)
|
| Depreciated value
| $14,000
|
| Selling price
| $23,000
|
| Gain on disposal
| $9,000
|
| Assessable income
| $6,000
|
| Gain in excess of cost
| $3,000
|
| Gain on disposal
| $9,000
|
The gain on disposal is composed of two parts:
- Assessable income of $6,000 represents the recoupment of depreciation claimed to date. That is, the difference between the asset's original cost and its written down value. This amount is included in assessable income as per the previous example.
- A gain of $3,000 which is the difference between the asset's original cost and its selling price. This gain is not necessarily included in assessable income. The operation of the general income provisions of the ITAA and the CGT provisions will determine whether some, all or none of this gain is included in assessable income.
Alternative Treatment of the Balancing Charge
(Balancing Adjustment Giving Rise to Assessable Income)
The balancing charge legislation only applies to assessable gains calculated under Section 59(2) ITAA. It does not apply to deductible losses calculated on the disposal of depreciable assets under Section 59(1) ITAA.
Section 59(2A) ITAA permits a tax-payer, in lieu of including the balancing charge in assessable income as per Section 59(2) ITAA, to successively reduce
- The cost of any unit of property acquired by the tax-payer during the income year to replace a unit of property disposed, lost or destroyed
- The cost of any other unit of property acquired by the tax-payer during the year of income
- The depreciated values, at the beginning of the year of income, of other units of property by such amounts as do not exceed, in the aggregate, the balancing charge
If the balancing charge is not fully absorbed in this manner the excess remaining is to be included in the tax-payer's assessable income of the year of income. [Section 59(2C) ITAA]
Attention: Where the balancing charge or part thereof is to be applied against the depreciated values at the beginning of the income year of other units of property, there is no statutory direction as to which assets the balancing charge should be applied.
If an asset is not replaced in the year of its disposal, loss or destruction but it is replaced before the end of the third year (assuming that a request to apply the balancing charge was not made in the disposal year), then the amount included in assessable income in the previous years could be excluded from income in that year and, applied as a balancing charge against a replacement asset purchased in the second or third year". [Section 59(2D) ITAA]
Where a balancing charge has been applied pursuant to Sections 59(2A) or 59(2D) ITAA, the balancing charge is deemed to be depreciation which has been allowed against that asset; that is, for the purposes of future deductions for depreciation and for any balancing adjustment on the disposal, loss or destruction of the asset. [Section 59(2E) ITAA]
The following examples illustrate the application of balancing charge.
Example 4
A balancing charge applied to a replacement asset.
- Asset disposed on the 30/06/93
- Replacement asset acquired on the 31/12/93 for $20,000
- Asset depreciated using the prime cost method at 10% per annum
- Balancing charge applied per S59(2) $1,000
- Adjusted cost for purposes of calculating depreciation $19,000
- Depreciation for 6 months to 30/06/94 ($19,000 x 10% for six months) $950
- Written down value $18,050
| Cost
| $20,000
|
| Balancing charge
| ($1,000)
|
| Adjusted cost for depreciation
| $19,000
|
| Accumulated depreciation
| ($950)
|
| Depreciated value
| $18,050
|
Example 5
A balancing charge applied to existing assets where no replacement assets or other asset additions have been made.
- Existing asset depreciated using the prime cost method at 10% per annum
- Depreciated value of existing plant and equipment as at 30/06/93 was $20,000
- Balancing charge previously applied to existing asset per S59(2) $1,000
- Adjusted cost of existing asset for purposes of calculating depreciation $19,000
- Depreciation calculated for the year ended 30/06/94, $1,900 (one year)
- Depreciated or written down value $17,100
| Depreciated value
| $20,000
|
| Balancing charge
| ($1,000)
|
| Adjusted cost for depreciation
| $19,000
|
| Accumulated depreciation
| ($1,900)
|
| Depreciated value
| $17,100
|
Example 6
A balancing charge applied against an asset partially replacing the disposed asset and the balance to existing assets.
- Asset depreciated using the prime cost method at 10% per annum
- Asset destroyed on the 30/06/93
- Amount recovered from insurance was $8,000
- Partial replacement asset acquired on the 31/12/93 for $6,000
- Depreciated value of existing plant and equipment as at 30/06/93 was $20,000
The amount of depreciation for 30/06/94 would be calculated as follows:
|
| Replacement
| Other Assets
|
| Cost
| $6,000
|
|
| Depreciated value
|
| $20,000
|
| Balancing charge
| ($6,000)
| ($2,000)
|
| Adjusted cost for depreciation
| --
| $18,000
|
| Depreciation to 30/06/94
| --
| ($1,800)
|
| Depreciated value
| --
| $16,200
|
Example 7
A disposal of a depreciable asset which has had a balancing charge applied to it.
- Depreciated using the prime cost method at 10% per annum
- Purchased 01/07/90 as a replacement asset
- Balancing charge previously applied per S59(2) $1,000
- Adjusted cost for purposes of calculating depreciation $19,000
- Accumulated depreciation $5,700 (three years)
- Written down value $13,300
| Cost
| $20,000
|
| Balancing charge
| ($1,000)
|
| Adjusted cost for depreciation
| $19,000
|
| Accumulated depreciation
| ($5,700)
|
| Depreciated value
| $13,300
|
| Selling price
| $23,000
|
| Gain on disposal
| $9,700
|
| Assessable income
| $6,700
|
| Gain in excess of cost
| $3,000
|
| Gain on disposal
| $9,700
|
The $1,000 balancing charge previously applied has been effectively included in the calculation of assessable income. Its effect on the calculation is as if the balancing charge was previously charged as depreciation (that is, accumulated depreciation). The effect is to make the assessable gain bigger at $6,700 with the balancing charge, instead of $6,000 if the balancing charge had not been applied [Section 59(2E) ITAA]
Example 8
A disposal of a depreciable asset which has had a balancing charge applied to it.
- Depreciated using the prime cost method at 10% per annum
- Purchased 01/07/90 as a replacement asset
- Balancing charge previously applied per S59(2) $1,000
- Adjusted cost for purposes of calculating depreciation $19,000
- Accumulated depreciation $5,700 (three years)
- Written down value $13,300
| Cost
| $20,000
|
| Balancing charge
| ($1,000)
|
| Adjusted cost for depreciation
| $19,000
|
| Accumulated depreciation
| ($5,700)
|
| Depreciated value
| $13,300
|
| Selling price
| $12,000
|
| Allowable deduction
| $1,300
|
The $1,000 balancing charge previously applied has been effectively included in the calculation of assessable income. Its effect on the calculation is as if the balancing charge was previously charged as depreciation (that is, accumulated depreciation). The effect is to make the allowable deduction smaller at $1,300 with the balancing charge, instead of $2,000 if the balancing charge had not been applied. [Section 59(2E) ITAA]
Balancing Charge For Buildings
Sections 124ZF to 124ZL (Division 10D Part III) ITAA permit a "depreciation-like" deduction or capital allowance for new buildings and improvements where the buildings are used for the purpose of producing assessable income or are used in research and development.
The deduction is not depreciation, and its operation is specified in another part of the Act. Therefore
- This capital allowance cannot be applied as a balancing charge.
- Assessable or deductible balancing adjustments cannot arise. Such adjustments would be of a non-assessable or of a non-deductible nature.
One exception to the above is that a deductible adjustment on buildings may arise if the asset has been demolished or destroyed prior to the disposal of the land under Section 124 ZK ITAA. The amount of the deduction is equal to the building's written down value, less the proceeds from insurance or salvage.
CGT
Provisions of Part IIIA ITAA (that is, the CGT provisions) provide for the inclusion in the assessable income of a tax-payer of any "net capital gain" which accrues to the tax-payer during the year. The capital gains and losses are deducted from any capital losses incurred during the year and with any net capital loss incurred in the immediately preceding year. Capital losses are not deductible, but are carried forward indefinitely until recouped by capital gains. [Section 160ZO(1) ITAA]
Calculating Capital Gains or Losses
In order to calculate a capital gain or loss:
- There must have been a disposal or deemed disposal of an asset [Section 160T ITAA]
- The asset must have been acquired or deemed to have been acquired on or after 20/09/85
- The asset's disposal must have occurred on or after 20/09/85
- The cost base, indexed cost base or the reduced cost base of the asset is used in the calculation [Section 160ZH ITAA]
The calculation of a capital gain or loss can be defined as follows:
- Capital Gain = Consideration Cost Base or Indexed Cost Base
- Capital Loss = Reduced Cost Base Consideration
The capital gain calculation uses the asset's indexed cost base if the asset is disposed 12 months or more after its acquisition. The capital gain calculation uses the asset's cost base if the asset is disposed of within 12 months of its acquisition. [Section 160Z(3) ITAA]
The cost base of an asset comprises not only the cost of the acquisition of the asset, the incidental costs of acquisition and disposal but also capital expenditure. The capital expenditure enhances the value of the asset and is reflected in the state of the asset at the time of its disposal, or is incurred in establishing, preserving or defending the tax-payer's title to, or right over the asset.
Specifically, the cost base of an asset is composed of a number of components. [Section 160ZH(1)) ITAA]
1. Purchase price of asset.
2. Incidental costs of the asset's acquisition and disposal. Incidental costs which have been or are allowable as a deduction are excluded.
3. Non-capital costs in respect of an asset (not being a personal use asset) acquired on or after 21/8/91.
4. Capital expenditure to enhance the asset's value.
5. Capital expenditure in establishing, preserving or defending the tax-payers title to or right over the asset.
The indexed cost base of the asset is each of the items 1,2,4 and 5 above, indexed as per Section 160ZJ ITAA plus item 3 above. (That is, item 3 is not indexed as part of the cost base). [Section 160ZH(2) ITAA]
Example 9
Indexing an asset's cost base.
- Asset is acquired on 20/09/85 for $10,000
- Asset is disposed on 25/09/91 for $22,000
The asset's cost base is indexed my multiplying it by the "indexation factor"
The "indexation factor" is:
The indexed cost base of the asset would be:
$10,000 x indexation factor of (215.7/144.2) = $14,958
| Asset's selling price
| $22,000
|
| Asset's indexed cost base
| $14,958
|
| Capital gain
| $7,042
|
The reduced cost base of an asset is the sum of the "reduced amount" of each amount which falls in categories 1,2,4 and 5 of the asset's cost base (above). Items in category 3 are not taken into account in calculating the reduced cost base of the asset. [Section 160ZH(3) ITAA]
The reduced amount of any consideration, incidental costs or expenditure in relation to an asset is the aggregate of the following two amounts. [Section 160ZK ITAA]
- Less: The amount of the consideration and so on, reduced by any part that is allowed or is allowable (or would but for Section 61 ITAA be allowable) as a deduction in any year of income.
- Add: So much of any amount assessable as income resulting from recouped depreciation upon disposal of an asset. This includes the balancing charge applied to reduce the cost or depreciated value of a replacement asset or any other asset.
Attention: A deemed value and a deemed date of acquisition may apply as a result of the operation of the CGT provisions. For example, Section 160ZZS ITAA, when a change in company ownership triggers a deemed sale of assets.
Example 10
Calculating the reduced cost base of an asset.
- Land purchased 15/07/86 for $400,000
- Building erected for $1,000,000
- Land and building sold for $1,200,000 after three years at a loss
- Capital allowance deductions over the three years [Section 124ZF to 124ZL ITAA] $120,000
| Reduced cost base of land
|
| $400,000
|
| Reduced cost base of building
|
|
|
|
| $1,000,000
|
|
- less Section 124ZF to ZK deductions
| $120,000
| $880,000
|
| Reduced cost base of asset
|
| $1,280,000
|
The capital loss incurred is $1,280,000 $1,200,000 = $80,000.
Example 11
Calculating the reduced cost base of an asset.
- Depreciated using the prime cost method at 10% per annum
- Accumulated depreciation $6,000 (three years)
- Written down value $14,000
| Cost
| $20,000
|
| Accumulated depreciation
| ($6,000)
|
| Depreciated value
| $14,000
|
| Selling price
| $18,000
|
| Assessable income
| $4,000
|
The reduced cost base of the asset is:
| Cost
| $20,000
|
| Depreciation allowed
| $6,000
|
|
| $14,000
|
| Add: assessable income
| $4,000
|
| Reduced cost base
| $18,000
|
Example 12
Calculating the reduced cost base of an asset.
- Depreciated using the prime cost method at 10% per annum
- Accumulated depreciation $6,000 (three years)
- Written down value $14,000
| Cost
| $20,000
|
| Accumulated depreciation
| ($6,000)
|
| Depreciation value
| $14,000
|
| Selling price
| $12,000
|
| Allowable deduction
| $2,000
|
The reduced cost base of the asset is:
| Cost
| $20,000
|
| Depreciation allowed
| $6,000
|
|
| $14,000
|
| Less: assessable income
| $2,000
|
| Reduced cost base
| $12,000
|
In examples 11 and 12 the reduced cost base is equal to the consideration in respect of the disposal. As a result, neither a capital gain nor loss arises. These examples show that a depreciable asset cannot have a capital loss.
Land, Buildings and Improvements
Buildings and improvements can be deemed to be separate assets. Normally whatever is affixed or attached to the land forms part of the land. The exceptions to this are [Section 160P ITAA]:
- Buildings constructed on land acquired pre-CGT are treated as separate assets to the land
- "Material" improvements to an asset acquired pre-CGT
