Depreciating assets

Members-only Log-in at right to access more information and value-added content, such as: effective life tables from the Tax Office decline in value calculator details of the 'simplified depreciation' concession for small business. Also access an article from The Taxpayer journal, 'Software: Deduction or depreciation'. Don't have a membership? Join now, or view member benefits.

Which assets? |  Working out the rate

If you reach into the purse to pay for a business expense, and that expense is directly related to you earning your income, you would not unreasonably expect that this outlay should be able to be claimed as a deduction on your income tax return.

Of course this is exactly what every one of us does every year, which is fairly straight-forward and works well for those one-off expenses that crop up each year, such as insurance premiums. But for bigger-ticket items, which will benefit the business for longer than a year, it's not just a matter of keeping the receipt and ticking off one huge tax deduction.

Instead, the cost of such assets needs to be spread out, or 'depreciated', over time, and a tax deduction taken on a part of that cost every year. The time taken to depreciate the asset's cost is known as its 'effective life', and you will eventually get to claim the full cost as a deduction, but this is dispersed over multiple years, or several years depending on the asset.

Which assets?
Prime examples of the sorts of assets that are used to produce assessable income, but which decline in value over time, are things like computers, cars, electrical tools or even buildings. Items such as land and trading stock are specifically excluded from the definition of depreciating assets.

And for an investment property – that is, a property that generates rental income – several household items can be depreciated, including dishwashers, heaters, stoves, fridges and washing machines. If ownership of a depreciating asset is shared, each owner works out the decline in value based on their proportionate interest in that asset, not on the cost of the asset itself.

Working out the rate
The actual rate of the decline in value is set by either of two methods, and you usually get to choose which method you want to use.

1.      There is the 'prime cost' method, which assumes that the value of the asset will decrease at a uniform rate over its effective life. That is, the amount of your tax deduction remains the same each year until the asset is written off.

2.      Or there's the 'diminishing value' method, which assumes the decline in value each year is a constant proportion of the value that then remains, and so produces a progressively smaller decline over time.

For both methods however, you need to set the time span over which the asset's value diminishes – the 'effective life'. This is expressed in years or portions of years. Things to be considered are reasonable wear and tear, the maintenance and upkeep of the asset, and a reasonable assumption of how long an asset can still be used to help produce income until it has passed its 'use-by' date.

Immediate write-off for purchase of motor vehicle from 2012-13
From 1 July 2012, small business entities (with a turnover of less than $2 million) will be able to:

• instantly write-off the first $5,000 of a new or used motor vehicle, and
• immediately write off each eligible business asset they buy costing less than $6,500 per asset.

The remainder of the value of any vehicle purchased to which the $5,000 immediate deduction applies would be included in a general business pool (depreciated at 15% in the first year then 30% thereafter).

 

Reviewed June 7, 2012

Back to top