How can I maximise the tax deduction for depreciation in my business?
There are two strategies you can use to maximise the amount that you claim for the depreciation of assets in your business:
Strategy 1 - Estimate the depreciation of an asset yourself
Strategy 2 - Hire a professional valuer to value your business assets
These strategies are both highly effective. Maximising your depreciation claim can potentially save you thousands of dollars. It is possible to establish a more precise and maximised claim for all your business’ assets. The effective life of an asset is the number of years an asset will last before it is no longer able to work and produce income. The effective life is used to calculate an asset’s decline in value, or depreciation. By using these strategies, you can accelerate the depreciation of an asset by reducing the asset’s effective life, compared to the general asset life rates suggested by the head of the Australian Taxation Office, the Commissioner of Taxation.
Strategy 1 – Estimate the depreciation of an asset yourself
Estimate the life of an asset yourself if you feel that its life is justifiably shorter than the Commissioner’s suggested life of the asset. The Commissioner of Taxation’s estimates are to be used as a guide. The Commissioner’s effective life schedules may not reflect the effective life of assets in your business. These schedules, which you can find at the Australian Taxation Office website (www.ato.gov.au), list individual assets and the number of years that each asset is expected to last.
Here are two examples of instances when the estimated life of an asset can be varied:
Example – 1: Cardiovascular assets at a gymnasium are expected to last 10 years. However, some gymnasium owners believe that gym assets don’t survive 10 years due to their patron’s constant usage. In this case, the life of the asset is reduced, to perhaps 5 or 6 years, and a larger proportion of the asset is claimed each year in depreciation.
Example – 2: A boardroom table has an effective life of 20 years. Some business clients claim that their boardroom table won’t last, or be used, for 20 years and they choose to reduce its projected life and increase the annual depreciation claim accordingly.
When estimating the effective life of a business asset, it is important to have strong and supporting evidence. Your depreciation policies need to be realistic. You can use the list below as a guide in determining the effective life of an asset in your business.
- If you have had the same asset before you can use the previous life-span as a benchmark.
- Find information on the asset released by engineers.
- Obtain specifications from the manufacturer.
- Investigate industry standards.
- Compare the way the asset is used by your business, to other businesses.
- If the asset is leased, the asset’s life can be aligned with the period of its lease.
Strategy 2 – Hire a professional valuer to value your business assets
You can hire a qualified professional who is experienced in valuing the depreciation on business assets. They can provide you with a report listing the deductions associated with each of the assets in your business. The report can be drafted by an appropriately qualified surveyor, valuer, project manager, architect or builder. The cost of the report is also a deductible expense.
What is depreciation?
To understand the concept of depreciation, think back to when you first purchased a motor vehicle. Some years later, it’s probably worth significantly less than its original value, or the amount you paid when you purchased it. The difference between the car’s purchase price and the vehicle’s value in later years, is its decline in value, or depreciation. The car has declined in value over time. Most assets depreciate in value over time but there are a few exceptions. If you happen to own an antique car, there is a chance that its value could increase during the year and this would have the opposite effect, that being ‘appreciation’ in value.
The decline in the value of an asset over time, or its depreciation, is specifically due to wear and tear during its period of use. It is classified as an administrative expense and listed in your business’ profit and loss statement. Depreciation is considered to be a fixed cost as the cost isn’t influenced by any other variable occurrences in your business.
Your accountant can prepare a depreciation schedule and calculate the decline in value of each depreciating asset in your business for you every year. By applying these depreciation strategies you can maximise your depreciation claim and minimise your tax liability.