Depreciation solves the problem of section.81(2)(a) which states that expenditure on the cost of acquiring capital assets is generally not deductible. Depreciation allows the cost of a capital asset used in gaining assessable income to be written off over a period of time as a tax deduction.
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 but do not include land and trading stock.
Depreciation starts on the day you begin to hold the asset. There are two methods used to depreciate an asset: prime cost, which assumes that the value of a depreciating asset decreases uniformly over its effective life – e.g. 20% per year over 5 years; and diminishing value which assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time – e.g. 20% of assets value in the first year and then 20% of the remaining value in the second year and so on.
Both businesses and individuals can use depreciation. Small businesses have set amounts that they can begin to depreciate an asset at or simply use 100% or the cost as a tax deduction, they also have the ability to pool assets together and depreciate them together.
Individuals commonly depreciate items such as computers. For individuals, where depreciation becomes important is with rental property investments. Claiming all items entitled to depreciation can make a difference for negatively gearing an investment in a tax return. Specialist quantity surveyors can inspect a property and provide a depreciation schedule. If you own a rental property under division 43 you can generally depreciate construction expenditure over a 40 year period.
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