When a car is disposed of, lost or destroyed, and if either of the One Third of Actual Expenses or Log Book methods car expense claim methods have been used, then a taxable adjustment can arise.
Why Is There An Adjustment?
In principle, an adjustment arises because the disposal proceeds of a car effectively give the taxpayer a refund of previous depreciation claims. This “refund” can result in a profit (taxable) or a loss (deductible).
An apparent profit or loss won’t always be taxable after the private and non-deductible components of depreciation have been eliminated.
Because a taxable adjustment can only arise in relation to depreciation claims, it is only the One Third of Actual Expenses and Log Book claim methods which directly give rise to an adjustment on disposal of a car. The other two methods (12% of Cost and Cents Per Kilometre) do not.
However, a potential complication is when the methods are mixed over periods of ownership, and to deal with the arithmetic it becomes necessary to use assumed (“deemed”) business use depreciation percentages for:
- Cents per kilometre method – deemed 20% business use (i.e. private use 80%); and
- 12% of Cost/Value method – deemed 33.3% business use (i.e. private use 66.66%)
The following example illustrates how this works:
- 1 July 2008: Kevin bought a car for $25,000.
- 2008-09: Kevin used the car 40% for business purposes, and claimed expenses (including depreciation) using the log book method
- 2009-10: Kevin’s business use of the car exceeded 5,000 kilometres, and he used the 12% of Cost/Value method to claim his car expenses
- 2010-11: Kevin was demoted, and the business use of his car decreased. He elected to use the cents per kilometre method to claim.
- 30 June 2011: Kevin sold the car to Julia for $15,000 (Julia paid fair market value).
The first step is to determine what is called the “Adjustable Value” of the car, at the time it was sold.
The Adjustable Value in this case starts with the cost ($25,000),
Less Depreciation for 3 years at 20% = $5,000 per year ($15,000)
The Adjustable Value = $10,000
Under our assumption 5, the sale value of the car (“Termination Value”) was $15,000
Therefore the gross adjustment amount ($15,000 – $10,000) = $5,000.
The second step is to reduce the gross adjustment amount by the extent of private use of the car over the 3 years of ownership.
Because Kevin used a different claim method each year, there are three separate calculations of private use:
- 2008-09 (Log Book) Private use = 60% x $5,000 = $3,000
- 2009-10 (12% of Cost) Private use deemed 66.6% x $5,000 = $3,333
- 2010-11 (Cents per Km) Private use deemed 80% x $5,000 = $4,000
=>Total Private Use Reduction Over 3 Years = $10,333
The gross adjustment amount ($5,000 determined above) is now proportionately reduced by the private use component, with the following formula:
- Reduced Adjustment Amount = $5,000 – ($5,000 x $10,333 / $15,000) = $1,556
The third step is to adjust the Reduced Adjustment Amount obtained from step two ($1,556) by calculating the log book proportion. This is because it is only under the log book method that there is a claim for depreciation, and therefore the gain on disposal (in this case it’s a gain) can only be taxable to that extent.
- The log book portion of the Reduced Adjustment Amount is calculated as the ratio of the number of log book days (1 year = 365 days) to the total days the car was held and claimed (3 years = 1,095 days).
=> Log Book Days (365) / Total days (1,095) x Adjustment Amount ($1,556) = $519
The resulting amount of $519 is positive, and is therefore included in Kevin’s income tax return for the year ended 30 June 2011, the year of disposal. Had the amount been negative, Kevin would claim a tax deduction.
- See Asset disposals – simplified depreciation rules
- Disposing of a depreciating asset
- Guide to Depreciating Assets – downloadable booklet. Search within for – “balancing adjustments”
This page was last modified on 16 August 2017