Section 1245 isn’t a household phrase, but if you’re an Australian investor or business owner dealing with depreciable assets, it’s one you can’t afford to overlook. While Section 1245 originates from US tax code, its principles echo through Australian tax law, especially as the ATO sharpens its focus on asset depreciation and capital gains in 2025.
Understanding Section 1245: The Big Picture
Originally part of the US Internal Revenue Code, Section 1245 deals with the recapture of depreciation on certain assets when they’re sold. In Australia, while we don’t have a direct equivalent called “Section 1245,” the ATO applies similar rules under Division 40 (capital allowances) and Division 43 (capital works deductions) of the Income Tax Assessment Act 1997. The core idea: when you sell a depreciable asset, part of the gain may be taxed as ordinary income, not just as a capital gain.
- What assets are affected? Plant and equipment, business machinery, and certain fixtures are key examples.
- How does it work? If you’ve claimed depreciation (or capital allowances), you may face ‘recapture’—where the ATO taxes the portion of the sale price reflecting previously claimed deductions.
- Why does it matter? Recapture rules can trigger higher-than-expected tax liabilities when you sell an asset, especially if you’ve aggressively depreciated it over its useful life.
2025 Policy Updates: What’s New?
Several developments in 2025 are set to impact how investors and businesses handle asset disposals and depreciation:
- ATO Data-Matching Expansion: The ATO’s 2025 compliance program is ramping up scrutiny on asset sales, particularly for high-value business equipment and commercial property. Expect more data-matching with land registries and equipment financiers.
- Instant Asset Write-Off Changes: The temporary full expensing measure is winding back, replaced by a $20,000 instant asset write-off cap for small businesses. This means larger assets will once again be depreciated over time, heightening the importance of recapture calculations at sale.
- Revised Guidance on Private Use Adjustments: The ATO’s latest guidance clarifies how to apportion depreciation between business and private use, impacting how much recapture applies when mixed-use assets are sold.
Real-World Examples: Recapture in Action
Let’s see how these rules play out in practice:
- Small Business Equipment Sale
Sarah owns a landscaping business and sells a ride-on mower in 2025. She originally bought it for $15,000 and claimed $10,000 in depreciation. She sells it for $8,000. The $3,000 above the undepreciated value ($5,000) is taxed as income—not a capital gain.
- Commercial Property Fit-Out
When a café owner sells her business, she includes a commercial fit-out (e.g., kitchen equipment, counters). She’s depreciated $40,000 worth of assets, but the sale price attributes $35,000 to the fit-out. The $35,000 is recaptured as assessable income, not a discounted capital gain.
- Mixed-Use Vehicle
John uses a ute for both work (80%) and personal (20%) use. When he sells, only the business portion of depreciation is recaptured, based on the ATO’s 2025 guidelines.
Key Strategies for 2025: Minimising Tax Surprises
- Track Depreciation Diligently: Ensure your asset register is up to date, with clear records of deductions claimed.
- Review Private Use: Document business vs. private use to avoid overpaying on recapture.
- Plan Asset Sales: Time disposals around tax year-end, and factor in recapture when forecasting after-tax proceeds.
- Stay Informed: With the ATO’s increased focus, expect more correspondence if asset sales don’t match reported depreciation.
Conclusion: Section 1245’s Lessons for Australian Investors
While Section 1245 itself is a US provision, its principles are alive and well in Australia’s tax landscape. With the 2025 policy shifts, it’s more important than ever for investors and business owners to understand how depreciation recapture works, keep detailed records, and plan strategically. Ignoring these rules could mean an unwelcome tax bill down the track.
