Capital Allowances: balancing adjustment events - car expense methods and the Simplified Tax System (STS)

Does section 40-370 of the Income Tax Assessment Act 1997 (ITAA 1997) apply when an STS taxpayer sells a car for which car expense deductions have been calculated under Division 28 of the ITAA 1997 using the one-third of actual expenses method and the 12% of original value method for different income years?

No. As the taxpayer is an STS taxpayer for the year in which the balancing adjustment event for the car occurred, section 40-370 of the ITAA 1997 does not apply.

In the 1999-2000 income year a taxpayer purchased a car to use for a taxable purpose. The taxpayer used the cents per kilometre method to calculate the car expense deductions in that year. For the 2000-01 income year the taxpayer used the one-third of actual expenses method. In the 2001-02 income year the taxpayer elected to enter the STS. For that income year the taxpayer used the 12% of original value method to calculate the car expense deduction. The car was sold in December 2001.

Division 28 of the ITAA 1997 provides four methods for working out deductions for car expenses for cars owned or leased by individuals or certain partnerships. Taxpayers can choose only one method each income year but are able to use different methods each year (section 28-20 of the ITAA 1997).

If the cents per kilometres method is used, section 28-30 of the ITAA 1997 provides that you need to consider the capital allowance rules in Division 40 of the ITAA 1997 if a balancing adjustment event occurs for the car. Section 28-55 of the ITAA 1997 provides the same rule where the 12% of original value method is used.

Section 40-55 of the ITAA 1997 prevents a deduction for the decline in value of a car for an income year in which a taxpayer uses the cents per kilometre method or the 12% of original value method. This means that if a taxpayer has only used the cents per kilometre method or the 12% of original value method, no balancing adjustment amount arises because the decline in value is not worked out under Subdivision 40-B of the ITAA 1997 (subsection 40-285(1) of the ITAA 1997).

However, if the taxpayer switches between these methods and the one-third of actual expenses or log book methods section 40-370 of the ITAA 1997 explains how to work out the balancing adjustment amount.

STS taxpayers generally work out their deductions for depreciating assets and some amounts of assessable income under Subdivision 328-D of the ITAA 1997 instead of under Division 40 of the ITAA 1997 (note 2 to subsections 40-25(1) and 328-175(1) of the ITAA 1997).

As the taxpayer is an STS taxpayer in the income year in which the balancing adjustment event occurred for the car and they had started to use the car for a taxable purpose before that income year, the STS rules in Subdivision 328-D of the ITAA 1997 apply. The balancing adjustment provisions in section 40-370 of the ITAA 1997 do not apply.