Put simply, depreciation is the decline in value of an asset.
It is the value of the decline each financial year that will then be included as an expense in the business' profit & loss account, and if eligible claimed as a tax deduction in the income tax return.
Here are the different types of depreciation, as a general guide:
1) Prime method (or straight line)
2) Diminishing value method
3) Asset Pools (general & low value)
4) Immediate asset write off
It must be noted that different rules apply for individual PAYG income earning tax payers compared to individuals and other entities such as companies and trusts carrying on a business.
Let's have a look firstly at what types of depreciation could be claimed by an individual income tax payer who is not carrying on a business:
The most common items would generally be electronic equipment such as computers & laptops, as well as tools of trade. Whatever the item, it must be used for your income producing activities, and it must have a cost base of more than $300 - items below $300 can be claimed outright.
An example would be the purchase of a desktop computer used for work, say at $1500. For this example we will assume it is used 100% for work related activities, and that it was purchased on 1 July of the income year.
Following on from the above types, we could now choose either the Prime or Diminishing value method to claim the decline in value of the computer over its "useful" life, which is determined by the ATO each year and published via a Taxation Ruling, the current one being TR 2017/2.
Using the prime method we would claim an equal amount over the life of the asset, so for the desktop computer it would be $1500 / 4 years = $375 claimed each financial year.
Under the diminishing value method we would claim a higher amount first, then calculate the depreciation for the next financial year on the "diminished value" of the asset, for our example we would claim ($1500 / 4) x 2 = $750, in the second year we would then claim ($750 / 4) x 2 = $375, in the third year it would be ($375 / 4) x 2 = $187.50 and so on, until we no longer use the asset or dispose of it.
If you purchase items that cost between $300 up to $1000, you can choose to group them in what is called a "low value pool". For example if you purchase 3 different work tools each costing $400, you could then choose to group them into the low value pool.
In the first year, when they are added to the pool, and regardless on what date they were purchased during the financial year, you would claim 18.75% depreciation.
So in our example you could claim ($400 x 3) = $1200 x 18.75% = $225 worth of depreciation. In subsequent years you can then claim 37.50% on the diminished value, it this case being ($1200-$225) x 37.50% = $365.62, and so on.
What if I am carrying on a business?
If you are carrying on a business, some of the above principals still apply, however depending on whether you are classified as a small business entity or not, will make a difference in terms of how you need to account for depreciation.
A small business entity is classified as a business with an annual turnover of less than $10 million in the financial year (as at the 2016/17 financial year).
In this article we will focus on small business entities:
As the rules currently stand, SBE's have various options under the simplified depreciation rules, but the main one being that any asset with a cost base of less than $20,000 can be written off immediately, ie claimed outright. Of course an adjustment must be made where the asset is partly used for private purposes.
Currently, the $20,000 immediate asset write off concession is scheduled to end on 30 June 2018, so we will all be tuning into the budget announcements coming up on Tuesday 8th May at 7.30pm.
For items over $20,000, you can choose to depreciate them individually using the ATO's useful life tables, or you can place the asset into what is called a "general asset pool".
It functions in the same way as the "low value pool", but with different depreciation rates:
15% depreciation in the year that the asset enters the pool, and 30% in subsequent years, calculated on the diminished value. Again, any private use must be excluded from the depreciation claim.
A good example here would be a motor vehicle, ute or van used for business costing more than $20,000. You could either depreciate it using the diminishing value or prime method over its useful life, or add the vehicle to the general pool.
I have an investment property
Maybe one of the most well known depreciation is connected to investment properties.
The ability for landlords to claim depreciation on property assets such as ovens, window furnishings, hot water systems, fixtures and fittings, capital improvements and in some circumstances being able to even claim on the construction cost has been much publicized and discussed.
We have seen some changes in this space over the last 12 months, in particular new restrictions when you acquire an existing investment property, which now limits what depreciation you can claim on plant and equipment that are already in that property when you purchase it.
It is now absolutely vital for all investment property owners to work with a professional tax depreciation service provider to ensure their depreciation claims are compliant with current taxation legislation.
G Henderson & Co works with a number of depreciation service providers to ensure all our clients with investment properties receive correct and up to date advice on what they are entitled to claim.
We hope you found this article interesting, feel free to contact us with feedback and/or suggestions, and of course if you have any questions in relation to your own specific taxation affairs.
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