Depreciating assets and tax deductions can provide property owners with a few sleepless nights when it comes to time for tax returns, says Matthew Mousa, property and tax expert at TLK Partners.
Investors Must Understand Depreciating Assets And Associated Tax Claims
Depreciating assets and tax deductions can provide property owners with a few sleepless nights when it comes to time for tax returns. Matthew Mousa, property acquisition tax expert at TLK Partners, offers information based on the latest tax regulations covering rental property, as published in the Australian Tax Office's Rental Property Owner Guide.
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,” Matthew explains, “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.
The effective life is the length of time the asset is expected to function correctly, so it can be used to help earn a rental income. There are 3 guidelines in this regard. First, the amount of wear and tear the asset be expected to take, considering its projected use; second, the asset must be maintained adequately to function effectively over its estimated lifespan; and third, the time the asset be expected to function before it is scrapped, and sold for no more than its scrap value.
Homeowners can attempt to work out the effective life themselves or 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.
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There are two methods for calculating the yearly depreciation, but first, the cost of the asset has to be determined. This has two elements: the purchase price or base value of the asset and 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.
“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,” Matthew clarifies. “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,” Matthew offers by way of reassurance.
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"Understanding changes to the taxation system is a must for every savvy investor, depreciating assets is just one component," Matthew concludes.
TLK Partners Wealth Management Companies Kingsgrove, Beverly Hills | Tax Accountant & Agent | Property Adviser are wealth advisers serving enterprises and private individuals who hope to take care of their future through sound financial management. Visit their website or contact them at (02) 8090 4324 for an appointment to discuss your financial management and investment needs.
This material is of a general nature only, it does not take into consideration your financial circumstances, needs or objectives. Before making any decision based on this content, you should assess your own circumstances, seek professional advice or contact our office to be directed to the appropriate professional. Whilst all care has been taken in presenting the material neither TLK Partners or its associated entities guarantee that the material is free of error and, the information may have changed since being published.
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