- The ins and outs for businesses, investment property owners and employees
- What is tax depreciation?
- What is a capital asset?
- What’s the difference between an expense and a depreciating asset?
- What’s not a depreciating asset?
- How to calculate tax depreciation
- Simplified Tax Depreciation schedule
- Are there other tax depreciation rules?
- How much can you claim tax depreciation each year?
- Tax Depreciation and capital allowances tool
The ins and outs for businesses, investment property owners and employees
If you’ve got a business, you are an investment property owner or you are an employee who buys capital assets for their job, you’ll want to know more about tax depreciation and deductions.
It could be the difference between paying more tax or less tax!
Ready to jump straight in?
What is tax depreciation?
Tax depreciation, according to the Australian Tax Office, is where you claim as a tax deduction the cost of capital assets over time.
This decrease in the cost of the asset reflects the asset’s decline in value through its use and over time.
Before we get started though, we need to understand what a capital asset is.
What is a capital asset?
Capital assets are those depreciating assets used to earn an assessable income.
Who can claim?
- Small and large businesses – this will include vehicles, equipment such as forklifts or warehouse racking, machinery to package your products, and computers.
- Rental property investors – items such as carpet, light and window fittings, showers, air conditioning units, hot water systems, white goods (stovetops and ovens), heat pumps, floating timber flooring, cupboards and furniture.
- Employees when buying equipment and tools from their own expense to use in their work.
What’s the difference between an expense and a depreciating asset?
A depreciating asset has a limited effective life and it’s expected to reasonably decline in its current value over the time it’s used.
This could include a forklift truck.
And the cost of the forklift truck will be depreciated over the years it is used.
Over time, the forklift’s value is not the same as the cost to buy it.
What’s not a depreciating asset?
Land, trading stock and some tangible assets are not depreciating assets.
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Hey business owners! Before we look into the details of tax depreciation, you need to know about temporary full expensing.
If you are eligible, this may be a better way to write-off your assets immediately, as opposed to depreciating them over several years.
Let’s check this incentive out:
Temporary full expensing
Temporary full expensing gives eligible businesses the chance to claim an immediate deduction for the business proportion of the cost of an asset in the year it is first used or installed ready for use as a taxable purpose.
Businesses with an aggregate turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new and second-hand depreciating assets.
The new assets must be first held, and first used or ready for use for a taxable purpose between 6 October 2020 and 30 June 2023.
If you want more detail, our blog, ‘What does temporary full expensing mean?’ is worth reading.
This claim can provide the opportunity for significant tax savings with careful and due diligent tax and capital asset investment planning.
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How to calculate tax depreciation
To calculate the tax depreciation deduction for most assets you apply the general depreciation rules (unless you are an eligible small business for the simplified depreciation, but we’ll get on to that a bit later).
These rules set out the amounts (capital allowances) that can be claimed each year based on the asset’s effective life.
Under general tax depreciation, an immediate write-off applies to:
- items costing up to $100 that are used to earn business income
- items costing up to $300 that are used to earn income other than from a business (such as employee-provided tools and equipment)
Simplified Tax Depreciation schedule
If you choose to use the simplified depreciation, you must:
- use them to work out deductions for all your depreciating assets except those specifically excluded
- apply the entire set of rules, not just individual elements (such as the instant asset write-off)
- only claim a deduction for the portion of the asset used for business or other taxable purposes and not for the portion for private use.
Please check the list of a small number of assets that are excluded from the simplified tax depreciation first.
Depreciating a vehicle? When using the simplified depreciation rules for a vehicle there is a car limit that applies to the cost of passenger vehicles.
Are there other tax depreciation rules?
Yes, there are other rules for depreciation to claim tax deductions.
It’s important for you to understand the type of asset you are purchasing.
- Capital works
Capital works include such items as repairing a warehouse or adding a mezzanine or building a house, replacing a roof, walls, and fences or adding rooms and repainting.
A different tax depreciation rule will apply to capital works. Capital works on your tax depreciation schedule are written off over a more extended period than other assets.
- Other business capital expenses
These include the cost of setting up or ceasing a business and project-related expenses.
- You must be the legal owner of the assets
Tax depreciation deductions are only generally available to the legal owner of the asset.
In the case of hire purchase arrangements (where you make regular payments to pay off the asset and are charged interest) the hirer rather than the legal owner is entitled to the deduction.
Where a partnership has assets, the depreciation deduction is claimed by the partnership, not the individual partners.
- The total cost of the asset
The total cost of the asset available for depreciation is not just the cost of the asset.
The cost of the asset also includes any additional costs you incur in transporting and installing the asset and repairing it immediately after taking receipt of the asset.
- Claim only the business use of the asset
Depreciation deductions are limited to the extent to which you use an asset to earn an income.
To explain further, if you use an asset for 60% of business purposes, you can only claim 60% of its total depreciation for the year.
For example, you are an electrician and you have purchased a tool bag for $1,000. You use the tools for 80% of the time in your job but use 20% on the weekend renovating your home. You can claim 80% of $1,000 in your tax depreciation schedule.
To claim depreciation deductions for most assets you apply the general depreciation rules as outlined (unless of course, you are eligible for the simplified depreciation rules or the temporary full expensing incentive).
How much can you claim tax depreciation each year?
There are two main methods to calculate depreciation deductions.
- Prime cost method – for some tangible depreciating assets such as intellectual property, you must use this method
- Diminishing value method
You must also use the same method used by the former holder of the asset – for example, if you acquire the asset from an associate such as your spouse or business partner.
Both methods require you to determine the asset’s effective life.
Different rules apply to:
- capital works such as buildings and structural improvements
- horticultural plants and water supply facilities used in primary production
- electricity and phone connections
- assets used in mining exploration
Tax Depreciation and capital allowances tool
To make it easier to calculate depreciation for most assets in your depreciation schedule for a particular income year, you can use the Depreciation and capital allowances tool.
This is a great tool to use first to compare the results of the two methods. You can then choose the better method for tax deductions for you.
We suggest you bookmark this depreciation and capital allowances tool, as there are many helpful ways you can use it.
- calculate the tax deductions for
- rental properties
- your small business pool
- your low-value pool
- capital works
- asset-based depreciation
- calculate your share of depreciating assets in a partnership
- calculate the decline in value on multiple assets
- compare depreciation amounts between the prime cost and diminishing value methods
- determine balancing adjustment amounts
- save your calculations so they automatically populate future year amounts in your depreciation schedule for use in your tax return, if you have a myGov account
- save your calculations for your records or send them to your tax agent
Tax depreciation and capital allowances tool
It’s important for eligible individuals and businesses to know which tax depreciation incentive is right for them.
If you are still unsure about tax depreciation, get in touch with Sleek.
We can help you with your depreciation schedule too. Our accounting team is waiting to help on +61 2 9100 0480 or use our chat box to get answers to all your tax depreciation questions.