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Depreciation

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 period 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. Only the following intangible assets, if they are not trading stock, are specifically included as depreciating assets:

  • In-house software.
  • certain items of intellectual property (patents, registered designs, copyrights and licences of these)
  • mining, quarrying or prospecting rights and information
  • certain indefeasible (cannot be annulled, cancelled or made void) rights to use a telecommunications cable system
  • certain telecommunications site access rights

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.

In most cases, it will be clear whether or not something is a depreciating asset. If you are not sure, we recommend that you contact your tax adviser or the ATO.

What is the difference between Prime Cost and Diminishing Value depreciation? 

The difference between the prime cost and diminishing value method is that the diminishing value method returns the greatest deductions over the first few years and the prime cost method returns greater deductions over the latter years.

For example if a buildings effective life is 40 years, then after around 6-9 years, the diminishing method will normally drop below the prime cost method. Both methods claim the exact same amount over the 40 years, so the decision is based on whether the owner is looking for immediate deductions or a more constant claim over the life of the asset.  The intentions of the asset holder will determine which depreciation method will be most suitable for them.

What is pooling?

Assets of low cost and low value (under $1000.00) can be treated as groups with depreciation applied to the group.  Pooling is used in conjunction with the diminishing value method to maximize deductions in the first 5 years of the depreciation schedule.

Low Cost pool - A low cost asset is a depreciable asset that has an opening value of less than $1000 in the year of acquisition. All depreciation can be claimed in the year of purchase.

Low Value Pool - A low value asset is a depreciable asset that has a written down value of less than $1000. That is, if the opening value of an asset is greater than $1000 in the year of acquisition but the value remaining after depreciating over time (opening value less depreciation in year 1 less depreciation in year 2 etc.) is now less than $1000. Assets meeting this classification are placed in an itemised pool.

(Guide to Depreciating Assets 2016 – ATO)

Please check with the ATO website for additional or updated information or check with your accountant for advice.

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