FAQs on depreciation for business owners
Depreciation, as a general definition is the expensing of the reduction in value of an asset due to the natural wear and tear of an asset over time.
As business owners, if you own commercial buildings, vehicles, or equipment, you will most definitely be dealing with depreciation. For the purpose of this article, we are discussing depreciation in the context of small business entities ($10 million turnover from 1 July 2016). These are the top frequently asked questions from our business clients.
Q: I have just purchased a $50,000 equipment, does this mean I will get $50,000 refunded back to me when I lodge my tax?
Depreciation is an expense item on the profit and loss. Let’s look at this example: your net profit before depreciation is $80,000, you purchase an equipment for $50,000. Assume that the equipment qualifies to be instantly written off, your net profit is now $30,000 ($80,000- $50,000). You pay tax on $30,000 (assume that you trade in a company and the company tax rate is $27.5%), then your tax payable is $8,250. Before depreciation, the tax payable is $22,000. Purchasing the equipment means that you have saved $13,750 worth of tax.
Q: Can I always write off the business asset I purchase for my business in full?
Depending on the value of the asset, your business turnover amount, and the date purchased, you may be able to completely write off the asset in the year you purchased it.
Instant Asset Write-off
- For asset first used or installed ready for use between 12 March 2020 until 30 June 2021 and purchased by 31 December 2020
- Threshold amount for each asset is $150,000.
Temporary Full Expensing
- For asset first used or installed ready for use between 6 October 2020 until 30 June 2023.
- There is no threshold amount for this rule (ie., it is unlimited).
If you do not qualify for either of the rule, you will need to look at small business pool.
Q: Can I purchase a $100,000 luxury car and claim it under my business?
The quick answer is yes, but you will not be able to claim 100% of the cost of the car as a business expense. Cars are subject to the car limit value each income year. In 2020/2021, that limit is $59,136 excluding GST. This means that, if you purchase a $100,000 BMW, you can only claim up to $59,136 and 1/10th of that in GST. If you use the car partly for private purposes, Fringe Benefit Tax may be applicable too. As a general rule, luxury cars are not a great tax strategy.
Q: Can I depreciate business assets that are on finance?
Yes, where the asset is financed with a chattel mortgage (most common) or hire purchase, the full value of the business asset is depreciable. On top of that, the interest paid on the loan is also a tax deduction. Be careful with leases, lease payments are treated as an expense.
Q: I’m going to the dealership on the 30 June to purchase a truck, can I claim that for the financial year tax return?
The ATO rules state that to claim for a tax deduction, the asset needs to be used or installed ready for use. Generally, when you purchase a vehicle from a dealership, it takes a couple of days for them to prepare before you can pick them up. In this scenario, paying for the truck by 30 June and picking it after will not qualify you to claim this as depreciation for the current financial year.
Conclusion
Depreciation is generally missed out on due to its complexity. Over the last 12 months, the ATO has introduced different rules in the depreciation space so spend some time talking to your accountant to make sure you are taking advantage of this tax benefit.