Capital Allowances: use and balancing adjustment events

Has a balancing adjustment event occurred under section 40-295 of the Income Tax Assessment Act 1997 (ITAA 1997) for an employee use motor vehicle that is subsequently provided for the private use of the shareholders of a company upon cessation of trading?

No. A balancing adjustment event has not occurred under section 40-295 of the ITAA 1997. The company has not ceased to hold the vehicle and the provision of the vehicle to the shareholders constitutes a use of the vehicle by the company.

A company purchased a vehicle in the 2001-02 income year. The cost of the vehicle did not exceed the car limit of $55,134. The vehicle was provided to the two employee shareholders as a fringe benefit until 30 June 2002. On 30 June 2002 the company ceased business activity and has no intention of resuming. The company retains ownership of the vehicle, which from 1 July 2002, will be used solely for private purposes by the shareholders. All expenses relating to the vehicle will be paid directly by the shareholders.

Section 40-295 of the ITAA 1997 provides that a balancing adjustment event occurs for a depreciating asset if you stop holding the asset; or you stop using it, or having it installed ready for use, for 'any' purpose and you expect never to use it, or have it installed ready for use, again.

The company is the holder of the vehicle under item 10 in the table in section 40-40 of the ITAA 1997. As the company has not disposed of the vehicle, the company remains the holder of the asset. Therefore, no balancing adjustment event has occurred for the vehicle under paragraph 40-295(1)(a) of the ITAA 1997.

The use of a depreciating asset can take many forms, ranging from the active use of a machine in a business' manufacturing process to the passive use of a statue as a decorative piece. A use that would result in the decline in value of a depreciating asset need not be physical. In Council of the City of Newcastle v. Royal Newcastle Hospital (1957) 96 CLR 493, it was considered that land which was owned by the public hospital was used for the purposes of the Local Government Act 1919 (NSW). The majority of the high court inferred that passive use, as distinct from active use, was sufficient.

Furthermore, a depreciating asset need not be used, or installed ready for use, for a taxable purpose in order to decline in value for the purposes of Division 40 of the ITAA 1997. However a deduction for the decline in value of a depreciating asset is only allowable to the extent it is used for a taxable purpose. Therefore, the use of a depreciating asset for a non-taxable purpose will reduce the holder's entitlement to a deduction under section 40-25 of the ITAA 1997. Taxable purpose means for the purpose of producing assessable income. As the company has ceased trading it is no longer undertaking activities that produce assessable income. From the point in time when the company ceased trading, any use of the company's assets is for a non-taxable purpose.

The provision of the company vehicle to a shareholder is a use, albeit not for a taxable purpose. Therefore, no balancing adjustment event has occurred for the vehicle under paragraph 40-295(1)(b) of the ITAA 1997.

As no balancing adjustment event has occurred at this time there is no need to work out a balancing adjustment amount under section 40-285 of the ITAA 1997.