Let’s get some of the concepts straight before lodging any claim!
To start off with, depreciation takes two aspects within the same concept, that is:
- The decrease in value of assets – fair value depreciation
- The allocation of the cost of assets to periods – the period in which they are incurred but start depreciation when it is ready to use
NOTE: the effective life of an asset stated in years governs the number of years over which you will need to apportion the cost.
According to our Tax Return’s professional team of accountants, the fair value is the value between two parties negotiating on the purchase of an asset. Therefore, capital assets that are expected to depreciate over time are called depreciating assets.
They can be:
- Motor vehicles
- Furniture, including carpet and curtains
- Electrical tools
- Plant and equipment
How To Calculate Your Depreciation Deduction Using The Simpler Depreciation Rule
If you are a small business whose total normal income and any associated business income is less than $10 million from 1 July 2016 and $2 million for previous income years, then under the ATO’s current rules you can:
- deduct any full cost of any asset you bought for less than $20,000 and used or ready for use, from 7.30pm (AEST) on 12 May 2015 until 30 June 2019
- pool most other depreciating assets that cost $20,000 or more in a small business asset and claim
- a 15% deduction in the first year (regardless of when you purchased or acquired them during the year)
- a 30% deduction each year after the first year
- write-off the balance of your small business pool at the end of an income year if the balance, before applying any other depreciation deduction, is less than $20,000.
If you think you’re not eligible for the simpler depreciation rule, then you can use the general depreciation rule, which sets the capital allowances to be claimed based on the asset’s effective life.
How To Calculate with the General Depreciation Rule
There are two methods in order to calculate with the general depreciation rule, which are:
By prime cost – assuming that the value of a depreciating asset decreases over its effective life.
RULE: Asset’s cost × (days held/365) × (100%/asset’s effective life)
If the asset costs $60,000 (after excluding GST if entitled to claim it) and has an effective life of five years, you can claim 20% of its cost, or $12,000, in each of the five years.
The calculation is:
$60,000 x (365/365) ×20% = $12,000
By Diminishing Value – comparing the results of the two methods while also providing disposal outcomes
RULE: Base value × (days held/365) × (200%/asset’s effective life)
If the asset cost $60,000 and has an effective life of five years, the claim for the first year will be:
$60,000 × (365/365) × (200%/5) = $60,000 x 40% = $24,000
The cost includes the value you paid for the asset (excluding GST if entitled to claim it) and any additional amounts paid for transport, installation or making it ready to use.
The base value reduces each year by the decline in the value of the asset. This means the base value for the second year will be $36,000; that is, $60,000 minus the $24,000 decline in value in the first year.
The claim for the second year will be:
$36,000 × (365/365) × (200%/5) = $36,000 x 40% = $14,400
The base value for the third year will be: $21,600 and the claim will be $8,640
The base value for the fourth year will be: $12,960 and the claim will be $5,184