Depreciating assets and tax deductions can provide property owners who are not tax experts with a few sleepless nights when it comes to time for tax returns. Baxton Property Management in Hobart offers information based on the latest tax regulations covering rental property, as published in the Australian Tax Authority’s 2017 Rental Property Owner Guide.
Which assets qualify as depreciating assets?
Identifying what is, and what isn’t, a depreciating asset depends largely on its expected lifespan. If it isn’t expected to last indefinitely, it is taken as being a depreciating asset, or one that will gradually lose value over a certain period. This gives rise to the term “depreciating asset”, and the expense involved in acquiring it is split for tax deduction purposes over the number of years this type of asset is likely to last.
Depreciating assets are often referred to as “plant”. Plant is considered to have a separate identity and function to the “setting” or building. In addition to not being expected to last for an indefinite period, plant is generally movable. A good example would be an air-conditioning unit or a stove, which are considered to be plant because they are both moveable, and have a relatively short lifespan. A carport which is attached to the building, or a fixed gazebo, on the other hand, are not movable, and are expected to last for a long period of time, so they are not treated as a depreciating asset. Expenditure on these fixed and long-lasting items, are considered to be for capital works and cannot be claimed as deductions in the same way as depreciating assets.
Calculating effective life
The effective life is the length of time the asset is expected to function correctly, so it can be used to help you earn a rental income. There are 3 guidelines in this regard.
- How much wear and tear will the asset be expected to take, considering its projected use.
- The asset must be maintained adequately to function effectively over its estimated lifespan.
- How long can the asset be expected to function before it is scrapped, and sold for no more than its scrap value?
You can attempt to work out the effective life yourself or you can use the guidelines set down by the Commissioner of Taxation. The Commissioner’s guidelines assume that the asset was bought new, and takes into consideration the respective manufacturing industry’s accepted circumstances of use.
How do you work out the yearly depreciation?
There are two methods for calculating the yearly depreciation. Before we do that we must determine the cost of the depreciating asset. The cost has two elements. The first is the purchase price or base value of the asset; and the second is the cost of capital improvement to the asset, in order to keep it working properly in its present condition.
The diminishing value method
In this method the value of the asset used for tax purposes is assumed to drop as a constant proportion of the diminishing value of the asset. This means the value claimed drops in progressively smaller and smaller amounts over the life of the asset.
In this method the purchase price is used as a base value for the first income year. For the second income year, the base value is the adjustable opening value, or value at the end of the first year, plus any costs involved in maintaining it so it can function effectively. Similar calculations are done each year until the end of the asset’s effective life.
The prime cost method
In this method, the asset is assumed to depreciate in equal yearly proportions over the life of the asset, and the yearly deductions remain constant. The formula only needs to be adjusted if there is a change in the cost, effective life, or adjustable value of the asset.
An exception to the rules
If you bought something that costs $300 or less, you can claim the entire cost in the income year in which you bought it, and there will be no need for complicated calculations of depreciation. Well, at least not on that particular asset.
This is by no means the whole story, when it comes to depreciating assets. We still need to discuss the difference between low cost and low value assets, the low-value asset pool, the purchase and subsequent depreciation of second hand assets, and the disposal of depreciable assets.
For all your property management needs, and further information regarding tax deductions, visit us at the Baxton Property Management website.
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– Baxton Media.
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