.
Depreciation


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 x days held x 150%
Effective Life 365

For assets acquired on or after 10 May 2006

Base value x days held x 200%
Effective Life 365

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:
  • work out their own estimate of the effective life of a depreciating asset, or

  • rely on the ATO’s determination of effective life

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
  • low-value assets for which the prime cost method was used to work out any deduction for decline in value for a previous income year

  • horticultural plants (including grapevines)

  • assets for which a deduction is made under the STS

  • assets that cost = or < $300 for which an immediate deduction was claimed

  • certain depreciating assets used in carrying on research and development activities

  • assets costing = or < $100 acquired by non-STS business taxpayers are immediately fully deductible and, therefore, cannot be allocated to a low-value pool

STS business taxpayers

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)

  • Diminishing Value method (DVM)

Prime Cost method (PC)

Under the prime cost method, the annual decline in value of a depreciating asset is calculated as follows:

Cost x days held
Effective Life 365

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
  • Taxpayer’s estimate of effective life

    - must relate to the total estimated period the asset can be used for the purpose of producing assessable income

  • ATO’s estimate of effective life

    The ATO publishes recommended periods of effective life which taxpayers may adopt as an estimate for depreciating assets – s.40-100

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:
  • decline in value must be calculated as if the asset was fully used for business purposes,

  • and then calculated after deducting for the private usage component

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

  • 100% immediate write-off for depreciating assets costing < $1,000

  • General STS Pool
    For depreciating assets with an effective life < 25 years

  • Long Life STS Pool
    For depreciating assets with an effective life of 25 years or more
    Long Life STS Pool

    Where the depreciating asset is acquired in a previous year
    5% x pool’s opening balance

    Where the depreciating asset is acquired in the current year
    2.5% x cost of the asset

Other incentives

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