DEPRECIATION (Decline in Value) – Chapter 9
MASTER TAX GUIDE CHAPTER 17
MTG 17-010, 17-020
A tax deduction is allowed for the decline in value of a
depreciating asset during the taxpayer income year.
The deduction allowed reflects the extent the asset was used
for business related purposes to produce assessable income.
Items which need considering when calculating the allowable
- cost MTG 17-080 – 17-105
- effective life MTG 17-270, 17-280,
- business use percentage
MOTOR VEHCILE COST LIMIT
• the ceiling for 2010/11 is $57,466
• the ceiling is indexed annually, and applies to luxury
• the disposal of a vehicle subject to the cost limit needs to
have an ATO formula applied to ascertain the reduced
consideration, in calculating any profit/loss on the disposal
Eligibility to qualify for a Depreciation Deduction
• Plant or Article
The item purchased has a direct association to the production assessable
The item purchased is over the ATO required dollar value.
- $300 for non SBE taxpayers where the asset is used predominately for
deriving business assessable income. MTG 17-330
- $1,000 for SBE taxpayers – MTG 17-820
• Owned by the taxpayer
Sec 40-40 list 10 rules for ownership
Used, or ready for use by the taxpayer.
If depreciating asset purchased during the year, then adjustment needs to be
made when calculating the allowable deduction.
METHODS OF DEPRECIATION Sec 42-160
FOR NON POOLED AND NON SBE ASSETS
1. Diminishing Value MTG 17-500
Base Value (cost or WDV) x days held during year x *200%
Effective Life 365
2. Prime Cost MTG 17- 490
Base Value x days held during the year x 100%
Effective Life 365
Any assets purchase after 1st July 2001, the decline in value
(depreciation) can only be calculated using either of the above 2 methods.
* For assets purchased before 10 May 2006 the rate is 150%
SBE – SMALL BUSINESS ENTITY
To be eligible to enter the SBE system the taxpayer must satisfy the
1. Carry on a business
2. Turnover less than $1million
3. Assets value less than $3million
SBE Deprecation Rules – for Assets of $1,000
General Pool - Asset life less than 25 years.
Decline in value rate 30% (15%)
Long Life Pool - Asset life 25 years or more
Decline in value rate 5% (2.5%)
DEPRECIATION (CAPITAL ALLOWANCE) SCHEDULES
• A depreciation (capital allowance) schedule is to be
maintained by all taxpayers that have allowable depreciating
assets, and will be claiming a deduction in the current year for
the decline in value of the asset.
• This schedule is not lodged with the ATO, but is to be retained
for 5 years for documentation and verification purposes.
• If the taxpayer has estimated their own effective life, then the
calculations of how the estimate was arrived at should also be
retained for 5 years.
• All taxpayers carrying on a business who are not in the SBE
need to complete a schedule.
POOLING OF LOW VALUE ASSETS
This is only available to taxpayers who are not a SBE
Assets that can be pooled are:-
1. Those purchased that have a cost value of less than $1,000
but greater than $300.
2. Assets whose WDV (adjusted value) is less then $1,000,
and the decline in value has been calculated using the DVM.
3. When pooling assets into the low value pool, private use
percentage must be taken into consideration.
4. Decline in value rate 37.5% full year (18.75% part year)
CALCULATING DECLINE IN VALUE OF LOW POOLED ASSETS
Closing pool balance from previous year X 37.5% (full year)
Total cost of assets added during the year X 18.75% (part year)
CALCULATING CLOSING POOL BALANCE
1. Closing pool balance from previous year
2. Business use %age of cost of purchases
3. Adjusted value (wdv) of assets added at start of the year
1. Decline in value calculated for the current year.
WRITE OFF FOR BUILDING AND STRUCTURAL IMPROVEMENTS
MTG 42-525 and 20-470
A deduction can be claimed for capital expenditure incurred in constructing
an income producing capital works.
The deduction is not available until the capital works have been completed.
Current Building write – off rates:-
4% travel and industrial buildings
2.5% structural improvement and residential income buildings
Formula to calculate the write – off:-
construction expense x applicable rate x days used
Balancing adjustments Required on disposal
(Profit/Loss on Disposal of an Asset)
•If the consideration received on the disposal of a depreciation
asset is greater than the adjusted value (written down value),
then a gain/profit on disposal has resulted, and this amount
forms part of the taxpayers assessable income for that year.
• If the assessable balancing adjustment arises due to the
involuntary disposal of an asset and subsequent replacement
of it, then the adjustment can be offset against the cost of the
new replacement asset (MTG 17-720)
• if the consideration received in less, then the resulting loss is
included as an allowable deduction.
• when calculating the loss/gain on disposal only business use
percentage is taken into consideration.
Balancing adjustments required on disposal where there is
partial business use - MTG 17-660
A formulae is applied to ascertain the reduced amount that would otherwise
Sum of Reductions (non- business use deductions)
Total Decline in Value
If total decline in value at 100% = $1,200 and business use is 80%, then
business use %age is $960. The sum of reductions equals $240.
Any balancing adjustment is reduced by applying the following formulae :-
EXAMPLE OF BALANCING ADJUSTMENT
WITH PART BUSINESS USE
Taxpayer purchased an asset on 1st July 2008 :
Cost price : $5,000 Effective Life: 10 years
Method of Depreciation : Prime Cost Sale consideration is $4,000
Calculate the decline in value , and the reduction in the balancing charge is the
assets was disposed on the 30th June 2011.
100% 75% 25%
Decline in Value Business Use Reduction
Cost 01.07.08 5,000 5,000
Less Decline in Value 30.6.09 500 375 125
Adjustable Value 30.6.09 4,500 4,625
Less decline in Value 30.06.10 500 375 125
Adjustable Value 30.6.10 4,000 4,250
Less Decline in Value 30.6.11 500 375
Adjustable value 30.06.11 3,500 3,875 125
Total Decline in Value :-$1,500 ($500 – 2009; $500 -2010; $500 – 2011)
Sum of the Reductions:- $375 ($125 -2009; $125 -2010;$125 – 2011)
Balancing adjustment reduction:- $375/$1,500 = 25%
COMPLETE EXERCISES FROM TEXTBOOK:
9.1 to 9.6
9.11 to 9.14