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Depreciation |
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s.40-30 defines a depreciating asset as "an asset that has a limited effective life and that is reasonably expected to decline in value over the time that it is used" e.g. equipment, plant, machinery, animals used as beasts of burden, intellectual property First element of cost - is generally the consideration (or amount) paid by the taxpayer for the asset Second element of cost - is generally the consideration (or amount) paid by the taxpayer to bring the asset to its present location and condition e.g. transport costs, modifications, alterations, improvements Diminishing Value method (DVM) For assets acquired pre 10 May 2006 Base value ![]() ![]() Effective Life ![]() For assets acquired on or after 10 May 2006 Base value ![]() ![]() Effective Life ![]() The DVM automatically applies unless the taxpayer elects to use the PC method Effective life of depreciating assets The decline in value of a depreciating asset acquired on or after 1 July 2001 is calculated on the basis of the effective life of the asset s.40-95 allows a taxpayer to either:
Special rates Low Cost items s.40-80(2) allows an immediate 100% deduction for depreciating assets costing $300 or less provided the asset was not part of a set whose total cost exceeded $300 This deduction is available only to non-business taxpayers (e.g. employees and landlords) Motor Vehicles are subject to a cost limit for decline in value calculation purposes for 2006/07 the cost limit is $57,009 this is the maximum depreciable value of a motor vehicle Reduced consideration equals: Actual consideration x Cost limit Actual cost Low Value asset pooling Exceptions
General STS Pool Where the depreciating asset is acquired in a previous year 30% x pool’s opening balance Where the depreciating asset is acquired in the current year 15% x cost of the asset Other incentives Capital works expenditure Division 43 allows a deduction for capital expenditure incurred on buildings, structural improvements and environment protection earthworks |
s.40-25 allows a deduction for the decline in value of a depreciating asset that is held by the taxpayer at any time during the income year The deduction is reduced by private usage of the asset. Where a depreciating asset is held only for part of a year, the decline in value is pro-rated Basis for decline in value Decline in value is calculated based on the cost of the asset The cost of an asset consists of a: First element of cost and Second element of cost Methods of depreciation to choose from:
Prime Cost method (PC) Under the prime cost method, the annual decline in value of a depreciating asset is calculated as follows: Cost ![]() ![]() Effective Life ![]() Disposal of depreciating assets Unless the termination value (i.e. selling price) of a depreciating asset exactly equals its adjustable value (i.e. written down value), then a balancing adjustment must be made A balancing adjustment is calculated by comparing the selling price and the written down value of the asset A balancing adjustment which is a loss on disposal is a deduction - s.40-285(2) (i.e. where termination value is less than adjustable value) A balancing adjustment which is a gain on disposal is assessable income - s.40-285(1) (i.e. where termination value is greater than adjustable value) Effective life of depreciating assets
Balancing charge where part business use If the deduction for the decline in value of a depreciating asset is reduced because the asset was used partly for non-taxable purposes, then under s.40-290 any assessable or deductible balancing adjustment is reduced by the fraction: sum of reductions total decline Therefore, two calculations for decline in value arise:
Low Value asset pooling Non-business taxpayers and non-STS business taxpayers may elect to claim deductions for decline in value of depreciating assets costing less than $1,000 ("low-cost assets") through a low-value pool – s.40-420 A depreciating asset whose decline in value was calculated using the diminishing value method for a previous income year can also be pooled where its opening adjustable value is less than $1,000 The decline in value of a low value pool is: Where the depreciating asset is acquired in a previous year 37.5% of the asset’s opening adjustable value Where the depreciating asset is acquired in the current year 18.75% of the cost of the asset Non-STS business taxpayers Non-STS business taxpayers are allowed an immediate deduction for low value assets costing $100 or less All other assets are depreciated separately according to their effective life, unless the taxpayer elects to use a low value asset pool STS business taxpayers
Buildings and structural improvements s.43-210 allows a deduction of 2.5% p.a. over 40 years e.g. flats, factories, office buildings, motels, casinos |
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