The latest Australian Bureau of Statistics report sheds light on the Australian business landscape. During the 2019-20 financial year, the business exit rate was 12.5 per cent, with a total of 291,821 businesses exiting the business community.
What happens to the assets these businesses own once they close their doors? The answer largely depends on what the then-business owner does with the asset after they close.
In this article, we will cover the three key scenarios:
- Scenario 1: They sell the asset
- Scenario 2: They dispose of the asset
- Scenario 3: They keep the asset
Scenario 1: They sell the asset
Several factors need to be considered when a business sells an asset.
Firstly, any asset that is sold at a profit may trigger a capital gains tax (CGT) liability.
CGT is paid if a capital gain is made when an asset that was used to produce income is sold. A number of factors impact the amount of CGT payable, and if the business is classed as a ‘small business entity’ further discounts and exemptions can apply.
Scenario 2: They dispose of the asset
If the business owner decides to dispose of the asset (i.e., throw it away), they may be able to take advantage of a process called scrapping.
Scrapping allows the business to claim an immediate tax deduction of the undeducted depreciable value in the year of disposal. ‘Depreciable value’ is essentially the value of the asset after its natural wear and tear.
For example, if a business closed and disposed of benchtops that held the undeducted depreciable value of $3,000, they could claim this as an instant deduction for that financial year.
When determining whether the closing business can claim scrapping upon asset disposal, factors include the business’s size, whether it was still operational while the asset was ‘scrapped’ and what depreciation rules the business chose. Whichever the case, a BMT Tax Depreciation Schedule has everything the business owner’s accountant needs to make the appropriate calculation.
Scenario 3: They keep the asset
A business that closes could keep an asset for several reasons. Maybe they are planning to reopen a new business in the future, or they might want to use it for personal use.
This means they won’t be able to scrap the asset as it’s not disposed of, and they also won’t be subjected to any CGT as they aren’t selling the asset.
But depending on the businesses model, size and if it was registered for goods and services tax (GST), there may be some GST implications or a GST modification requirement. An accountant may also need to do a balancing adjustment event when the asset has stopped producing an assessable income. This balancing adjustment won’t necessarily work like scrapping, as the asset will still have reasonable market value.
The business owner’s financial situation can change the ongoing use of the asset. For example, if they held a loan on the asset, they can no longer claim the interest repayments as tax deductible business expense.
To learn more about depreciation and how you can claim scrapped deductions, call BMT on 1300 728 726 or Request a Quote.