Asset Depreciation: The Basics of Tax Claims
If you’re purchasing capital assets to earn income, you should be aware that you can’t claim immediate tax deductions. Instead, you’ll need to write off the costs of your assets over the years. This is called depreciation and can be a complex and time-consuming task without proper help. If you’re planning on purchasing capital assets in the near future, familiarise yourself with the basics and work with the right kind of business accountant.
The Basics of Depreciation
You can depreciate your assets if you’re earning your income in the following ways.
You use assets as part of the business you run
Your employment uses assets as part of your job
You rent out an investment property that contains capital assets
Depending on how you earn taxable income, the type of assets you write off may be incredibly varied. These costs are usually based on the amount you paid for a particular asset, the costs incurred by transporting and installing the asset, and the costs used for initial repairs.
The depreciation amount you can claim will depend on how much the asset is used to earn your assessable income. If the asset is used for private or domestic purposes, this will have to be deducted from your total costs, as depreciation charges can only claim business-related costs. If you purchase a desktop computer, for example, and use it for both your job and private purposes, you will only claim depreciation for half the cost.
General Depreciation Rules
Among the assets you can immediately write off are:
Items costing up to $100 that help earn business income
Items costing up to $300 that is used to earn income outside of your business (i.e. business equipment)
Every asset that costs greater than the above amounts must be written off across its effective life cycle. To determine this period, you can refer to the ATO’s list of effective lives for assets.
How to Calculate Depreciation
There are two main methods of calculating depreciation.
Prime cost method: the cost is written off over the asset’s effective life.
Diminishing value method: the base value of the asset diminishes each year and is reduced by the amount of the previous year’s depreciation.
Prime cost methods are more consistent, whereas diminishing values produce larger deductions during the initial years of ownership. Be sure to arrange accounting solutions for which option works best for you.
How to Use Depreciation in Small Businesses
If you run a smaller business with an aggregated turnover of less than $10 million, the rules of depreciation can be simplified. You can immediately write off assets costing less than $20,000 or add assets that cost more to a business pool that depreciates at 15% in the first year and 30% in the following years. These simplified rules are generous and can put your small business at an advantage.
Capital Works Deductions
To write off the cost of buildings, you can consider capital works deductions, which can be claimed on:
The cost of property construction
The costs of any alterations and improvements
The cost of environmental protection
These can be claimed on residential and commercial properties used to generate income. Most capital works deductions are written off at 2.5% per annum over 40 years or at 4% for industrial buildings and hotels.
Tax depreciation is a tricky process, so getting all the help you need is key to avoiding any accounting mistakes. Need a hand? We at New Wave Accounting provide business owners with the best tax accountants in the Gold Coast and can help take mind-boggling numbers out of your hands.