The benefits of asset depreciation

Asset depreciation can have significant tax minimisation benefits for your business.

However, to avoid falling foul of the tax department and to ensure you make the most of your depreciable assets, there are some important aspects of depreciation that owners and managers of small businesses should keep in mind.

What is asset depreciation?

Depreciation is the loss in value from wear and tear of an asset of your business. That loss in value can be claimed as an expense and has implications for your tax reporting.

A car, for example, is a depreciable asset and the deduction you can make (or its loss in value) gets apportioned over a number of years.

How does a business use depreciation?

"The basic idea of depreciating assets for small to medium sized businesses is that it helps you minimise your tax," says Jamie Mobbs, principal of Mobbs & Company Accountants.

"There are lots of concessions for businesses of different sizes for the things that they buy. If you buy a particular car or piece of equipment it gets done at different rates. From those deductions you owe less tax at the end of the year."

Which assets are depreciable and which are not?

"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," says the Australian Taxation Office (ATO).

For example:

•  computers and other office equipment
•  electrical tools
•  furnishings
•  carpet, curtains and other fittings and fixtures
•  vehicles
•  buildings
•  some items of intellectual property: patents, registered designs, copyrights.

However, every business is different and you will need to ask an accountant or the ATO to find out what you can depreciate.

Methods of depreciation

Jamie says you should ask an accountant which method best suits your individual business and the asset you are depreciating. The main depreciation methods are:

• Prime cost: Assumes the asset will lose the same value each year. Also known as straight line depreciation.
• Declining balance: Offers a higher depreciation in the first year, then declining value in subsequent years.
• Sum of the year digits: Accelerated depreciation thatwhich assumes an asset will lose more value in its first few years.  A faster depreciation method than straight line, but not as fast as declining balance.
• Units of production: Used where an asset has a limited life and the rate of consumption varies over time.

Make the most of your business

Do everything you can to minimise your tax by depreciating assets used in generating income.

Ask an accountant today for advice on asset depreciation, and the financial benefits it will bring to your business.