Think you know everything about making the most of your tax return? Deductions may be one thing, but asset depreciation is another story entirely. Learn the basics of asset depreciation in order to maximise your tax return every year.
What is Asset Depreciation?
Asset depreciation is the decline in value of a particular asset. Under Australian tax law, you may be able to reduce your taxable income each year by claiming a deduction for the depreciated value of certain assets (known as capital assets) over a period of time.
Assets can depreciate individually or collectively in what is known as an asset pool.
How to Determine Depreciation Value
There are two methods you can use to individually calculate asset depreciation. These are the prime cost and diminishing value methods. However, whatever method you pick for that asset, you need to stick to it.
- Prime cost: Used to depreciate assets by equal amounts each year
- Diminishing value: Uses a percentage to calculate depreciation, with a larger amount calculated in the first year
Sometimes it helps to do a cost-benefit analysis, as one method may afford more advantages than another, depending on the asset and value. For information on how to calculate depreciation values, visit the ATO website.
When to Use an Asset Pool
There are special tax rules to enable you to calculate depreciation of collective assets under certain circumstances. Two examples are the low-value pool and the small business pool.
Sometimes it makes more financial sense to depreciate the assets in a pool rather than individually, due to some depreciation pool benefits.
Low-value pool: Enables fast depreciation of assets originally valued up to $1000 (excluding assets that cost $100 or less).
- Deductions are at 18.75% of the value in the first year then 37.5% onwards. This is generally higher than other depreciation rates
- Once created, all low-value assets that year and onwards must be put in the low-value pool
- There are exceptions to the kind of assets that can be included in a low-value pool, such as existing prime cost depreciation assets or horticultural plants
- If a low-value pool asset is destroyed, you can’t write off any remaining amounts
Small business pool: Small businesses with a turnover under $2 million can pool assets valued over $20,000.
- You can write off assets valued up to $20,000 instantly without having to claim depreciation
- Depreciation rates are 15% in the year of purchase and 30% for each year onwards
- Some assets are excluded under tax laws
- The pool value will change from 1 July 2017 to include assets valued over $1000
How Do I Calculate the Effective Life of an Asset?
While some assets have strict rules determining their effective life for tax purposes, others you can either estimate yourself or use ATO estimates.
Examples of assets where strict terms apply include computers, laptops, digital cameras, motorcycles, musical instruments, cooling systems and LED lighting and screens.
Remember, accounting software can help you calculate your depreciation values and track your pool assets so you can maximise your tax return every time.