As part of our process for preparing a client’s financial statements, we review the asset schedule with the client to ensure that it is accurate and up to date. This year, with the high milk, beef and lamb prices, we are looking even more closely as we look for extra deductions. We take the time to check that we have accounted correctly for any assets that no longer exist. Some of these may have been sold for cash or given away, while others are past their useful life and are no longer being used. As we review the asset list, we are asking for details on anything that has been sold, scrapped, stolen or is no longer used. The accounting treatment for assets that have been sold is straightforward. The asset is sold out of the asset schedule and the sale may give rise to a loss on sale, capital gain or a depreciation recovery.
If insurance proceeds were received for the loss of an asset, this is treated as a notional sale of the asset to the insurance company. Where the assets (other than buildings) are scrapped, the asset is written off (sold for $0.00 in the asset schedule module of the accounting software) and any remaining tax value is claimed as a loss on disposal. What is important is that the asset must actually be scrapped – we need to discuss the fate of the ‘scrapped asset’ with the client rather than simply writing it off. Methods of scrapping include burying, donating, dumping, recycling, burning or disposing of it in the farm rubbish tip. Leaving the asset in a paddock under a tree/hedge or storing in an old farm shed is not scrapping. Instead, the asset is being stored and is available for future use. To claim a deduction for assets that are no longer used but are physically retained, we need to look at Section EE 39 of the Income Tax Act 2007. Subject to meeting several conditions, this section allows the taxpayer to claim the asset’s written down book value as a depreciation loss. This section applies to depreciable property –• that is no longer used, and• is not a building, and• has not been depreciated using the pool method. The taxpayer is then entitled to claim a depreciation loss if –• they no longer use the asset in deriving assessable income, and• neither the taxpayer nor any associated party intend to use the asset to derive assessable income, and• the costs of disposing of the asset would be more than any consideration derived from disposing of the asset. To claim the depreciation loss, we need to consider what is meant by the phrases ‘no longer used’, and ‘costs of disposal’. The meaning of ‘no longer used’ has to be taken at its face value.
The asset must have ceased being used, and there is no intention for it to ever be used again. Reasons may include obsolescence, change in farming practice or maybe the asset being worn out or broken. ‘Costs of disposal’ can reasonably be taken to include freight, sales commission, rubbish tip fees or recycling charges. A reasonable effort should be made in calculating the disposal costs and the onus of proof would be on the taxpayer to justify the actions taken. The recent increases in local council rubbish dump fees and the low price of scrap metal may be reasons for not disposing of the assets. There is no immediate deduction available for assets with low tax values that are still in use. While it is tempting to clear these assets out to make the asset register look more presentable, the assets must continue to be depreciated. The asset should remain in the asset register even when the residual tax value is zero. Part of the reason for this is if the asset was to be sold in a future period, we need those details to accurately calculate any depreciation recovery on sale. The asset schedule also provides a breakdown of the assets owned by the business. While the assets are recorded at a written down book value, the actual market value of the assets can be much higher. This provides a good way of keeping track of these assets, especially when dealing with businesses with multiple owners.
Example 1 – The old Massey Fergusson tractor is parked in an old shed along with all of its 1950s era accessories (plough, tray, discs, etc.). The tractor has long since been replaced for farm work by the new John Deere. No deduction is available unless the costs of disposal of the tractor and its accessories are expected to exceed its disposal proceeds. Although old, the tractors is likely to still be saleable to a collector, lifestyle block holder or recreational fisherman who has a boat.
Example 2 – Computers rapidly become obsolete and have almost no market value. But to dispose of them in an environmentally acceptable manner comes at a cost. They are often stored in a back room as most people don’t want to pay the disposal costs. Here, a deduction could be claimed under Section EE 39.
