It is common for some business owners to use business assets for personal (or private) use. The Australian Taxation Office (ATO) considers this personal use non-deductible.
The way private use is treated depends on whether your business is using the Small Business System (SBE) or the Non-Small Business system (also known as Non-SBE).
This support note explains how to reflect private use under both systems.
There are four events that can be affected by private use:
If the amount you paid for your asset includes GST, the private use proportion of that GST cannot be claimed. This unclaimable amount of GST becomes part of the cost price of the asset.
Example:
Price = $10000 + $1000 GST (Total $11000)
Private Use = 20%
Cost for depreciation purposes = $10000 + ($1000 X 20%) = $10200
Although $11000 has been paid by the business, the remaining $800 GST is claimed back on the Business Activity Statement.
Using the example above, only the business use portion of the asset cost is allocated to the General SBE pool.
Example:
Asset Cost $10200 X (100% - 20% private use) = $8160
Depreciation will now be calculated on the reduced amount of $8160 allocated to the General SBE pool.
If you change the private use percentage of an asset by up to 10 per cent, no adjustment is necessary. The change is calculated from the original private use percentage at the time of acquiring the asset, or the time of the last adjustment as a result of a change in private use.
If the private use percentage is changed by more than 10 per cent, an adjustment is necessary.
Example:
Private use percentage at time of acquisition | 20% | |
Reassess private use percentage | From 20% to 31% | Adjustment necessary (over 10%) |
Reassess private use percentage | From 31% to 41% | No adjustment (exactly 10%) |
Reassess private use percentage | From 41% to 42% | Adjustment necessary (cumulative adjustment of 11%) |
There are two formulas for calculating the private use adjustment, depending on whether the asset was acquired while you were an SBE taxpayer or while you were a Non-SBE (or pre-SBE) taxpayer.
If the asset was first acquired while an SBE taxpayer, the formula is:
Reduction factor | X | asset value (cost) | X | [present year (taxable use) estimate - last estimate] |
Example:
0.85 | X | $10200 | X | [(1 - 0.31 Private Use) - (1 - 0.20 Private Use)] | = | -$953.70 |
The Reduction Factor is calculated as follows:
[1 - (full pool rate/2)] X (1 - full pool rate)n - 1
(n = number of years in the pool, excluding current year)
If the asset was first acquired while a Non-SBE (or pre-SBE) taxpayer, the formula is:
Reduction Factor | X | asset value (when entering STS) | X | [present year (taxable use) estimate - last estimate] |
The Reduction Factor is calculated as follows:
(1 - full pool rate)n
(n = number of years in the pool, excluding current year)
There are special rules applying to private use adjustments.
For assets in the General SBE Pool, adjustments can only be made for the first three years allocated to the pool (last adjustment to be made at the start of the fourth year).
What adjustments are necessary when I dispose of an asset with private use?
When you dispose of an asset that has had an element of private use, an adjustment is required to the sale proceeds.
To calculate this adjustment, you first need to calculate the average of the private use percentages throughout the life of the asset.
Example:
First Year | 15% |
Second Year | 30% |
Third Year | 15% |
Average [(15% + 30% + 15%) / 3] | 20% |
Next, multiply the GST-exclusive sales proceeds by the percentage calculated
$1000 sale proceeds X 20% = $200 Private Use adjustment
An amount of $800, representing the business use proportion , is deducted from the pool balance ($1000 - $200 adjustment).
There are four events that can be affected by private use:
If the amount you paid for your asset includes GST, the private use proportion if that GST cannot be claimed. This unclaimable amount of GST becomes part of the cost price of the asset and is referred to as a reduction.
Example:
Price = $10000 + $1000 GST (Total $11000)
Private Use = 20%
Cost for depreciation purposes = $10000 + ($1000 X 20%) = $10200
Although $11000 has been paid by the business. the remaining $800 GST id claimed back on the Business Activity Statement.
The private use percentage of an asset is used to reduce the calculated depreciation that can be claimed.
Example:
Cost: $10000, held for full year
Depreciation Method: Diminishing value
Effective Life: 10 years
| Cost / Opening Adjustable Value | Depreciation | Reduction (Private Use component) | Claimable Depreciation |
Year 1 - 20% Private Use | $10000 | $1000 | $200 | $800 |
Year 2 - 30% Private Use | $9000 | $900 | $270 | $630 |
Year 3 - 10% Private | $8100 | $810 | $81 | $729 |
When an asset is disposed, an adjustment is made to the gain or loss to take into account the private use of an asset.
The adjustment is calculated as follows:
Example:
An asset that cost $10200.00 with an adjustable value of $8262.00 at time of sale was sold for $1000.00.
$433.50 | X | 100 | = | 22.36842% |
$1938.00 | | | | |
$1000.00 | - | $8262.00 | = | -$7262.00 |
-$7262.00 | X | 22.36842% | = | $1624.39 |
$7262.00 | - | $1624.39 | = | $5637.61 |
There is a way to check the total private use adjustments:
-$9200.00 | X | 22.36842% | = | -$2057.89 |
This is the adjustment on sale of $1624.39 added to the Reductions of $433.50 related to depreciation.
The same calculations are made when an asset is written off.
When an asset is acquired, an adjustment is made to allow for unclaimable GST in the same manner as for an asset in the SBE pools.
On disposal, there are no adjustments necessary for changes in private use, as a low-value pool asset can only be given a private use percentage at the time it was acquired.
Assuming a low-value pool asset was sold for $300.00 and was used 20% for personal use, $240.00 would be allocated to reduce the low-value pool and $60.00 would be non-assessable income.