The decline in value of a depreciating asset is worked out on the basis of its effective life. Generally, the effective life of a depreciating asset is how long it can be used for a taxable purpose, or the purpose of producing exempt income or non-assessable non-exempt income:
• having regard to the wear and tear you reasonably expect from your expected circumstances of use
• assuming that it will be maintained in reasonably good order and condition, and
• having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.
Effective life is expressed in years, including fractions of years and is not rounded to the nearest whole year. For most depreciating assets, you may either make your own estimates of effective life, or use the Commissioner’s effective life determinations
The two methods of working out a deduction for the decline in value of a depreciating asset such as a computer, tools and equipment are the diminishing value method and the prime cost method.
What is a depreciating asset?
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include such items as computers, electric tools, furniture and motor vehicles.
Land and items of trading stock are specifically excluded from the definition of depreciating asset. Most intangible assets are also excluded from the definition of depreciating asset. Improvements to land or fixtures on land (for example, windmills and fences) may be depreciating assets and are treated as separate from the land, regardless of whether they can be removed or not.
Who can claim deductions?
Only the holder of a depreciating asset can claim a deduction for its decline in value – in most cases this will be the legal owner. If there is more than one holder of a depreciating asset, each person’s interest in the asset is treated as a depreciating asset. Each person works out their deduction for decline in value based on their interest in the asset (for example, based on the cost of the interest to them, not the cost of the asset itself) and according to their use of the asset.
In most cases, it will be clear whether or not something is a depreciating asset, if you are not sure if you can claim the deduction please contact the experienced team of tax accountants and tax agents here at The Quinn Group. For more information about decline in value deductions as well as any other tax related queries submit an online enquiry or call us on 1300 QUINNS (784 667) or +61 2 9223 9166 to book an appointment.