DEPRECIATION TERMS FOR A CONFUSED NEWBIE?

Hi,

I’m certainly no authority on this subject, but I’ll try to help. I have learnt what I know through reading many books on the subject.

I can recommend the use of a quantity surveyor. They will provide you with a list of all depreciable plant and equipment in your property, their value and the effective life of those items. This information can then be used at tax time for depreciation.

The ATO has a list of plant and equipment and has outlined their “effective life”. For example, a hot water system has a life of 20 years and so the value (new or current value as per the quantity surveyors report) can be depreciated at a set rate over that period.

There are a few methods available to depreciate plant and equipment….the two common ones are Diminishing Value or Prime Cost. The rates of depreciation are different for each method.

Diminishing Value
Calculated by the following formula;

Current Value * (Days Owned/Days in year) * (150%/effective life)

So in the Hot Water system example…if it was currently valued at $400 and you had owned the property for the entire year….

= $400 * (365/365) * (150%/20 years)
= $400 * 1 * 7.5%
= $30

Next year the value would $370 ($400 – $30)
The following year $342.25, and so on.

As you can see, the value you claim decreases over the life of the item.

Prime Cost
Calculated by the formula;

Cost * (Days Owned/Days in year) * (100%/Effective life)

In the case of the hot water system….

= $400 * 1 * (100%/20 years)
= $400 * 5%
= $20

So with the Prime cost method, the deduction remains the same value for the life of the item…in this case $20 per year for 20 years = $400.

However, if the item is not new, a quantity surveyor will be able to give you the item’s ‘remaining life’. So the water heater may be 6 years old and has a life of 14 years. Therefore it could only be depreciated over the next 14 years based on the current value.

Wow, this is confusing…I hope I make sense so far?

Low Value Pooling
Once items of plant or equipment reach a value (or the new cost) of less than $1000, they can be added to a “Low Value Pool”. This in reality is a paper exercise, but it lets you depreciated these items a total dollar figure rather than a individual item. The depreciation of the low value pool is via the diminishing value method at a rate of 37.5%.

Items under $300
Items costing or with a value of $300 or less can be written off in total in the first year.

Special Building Write-off
Here again the quantity surveyor can help. You need to know the construction cost of the property. The date of construction is important, but if the property was constructed after 18 July 1985 then you are able to depreciate the building. the rate depends on the date of construction…

18 July 1985 – 15 Sep 1987 : 4% per year over 25 years.
16 Sep 1987 – current : 2.5% over 40 years.

So a property built in 1996 and costing $50,000 (construction cost, not purchase price) can be depreciated at $1250 per year over the next 32 years (40 – 8 years).

However, the special building write off has implications with respect to CGT. Basically, any depreciation is deducted from the original purchase cost for CGT assesment. In the example above, you have claimed the special building write off since it was built. You purchased the property for $100,000 and sold it for $200,000.

For CGT purposes the you new actual purchase cost is;

= $100,000 – ($1250 * 8 years)
= $100,000 – $10000
= $90,000

Therefore for CGT your profit is $110,000 ($200k-$90k) not $100,000. Please note that there are more factors and costs to be included in this calculation, for simplicity I have neglected those. I’m not saying this is good or bad, just something to consider.

Reference claiming depreciation for past years, I am fairly sure you can claim the special builing write off for years past (up to 3 years I think). For your Canberra property, I think it would be too late as you no longer own the property…. best to check with an accountant on that one.

A couple of books that I have read clearly explain all this;

“Rental Property and Taxation” by Tony Crompton is very good.

The following links to the ATO site should help with a bit (lot) more info…
Guide to depreciating assets 2003
Low Value Pool
…assets costing less than $300
Rental Properties 2003

Well, that’s about it. I hope this has all made sense and has helped.

Greg.

There are many changes about to be introduced from the ATO they are targeting illegal claims so be vary careful, get the latest tax dep. pac from the ATO and a good accountant. Good luck!

if you are looking for a quantity surveyor, look in the yellow pages under quantity surveyor. i know there are some in wagga, but i havent had to use any of them. i dont own property in wagga but my parents still live there. if your accountant doesnt understand depreciation etc, i would strongly suggest you find a new accountant.
i used the family accountant for years, until i found out he had not been giving me all the information i needed, simply because he didnt know!. as you can imagine i have hired and fired several accountants since then, and thankfully i now have a good one here in canberra.
just food for thought
shaun

Lead, Follow or get out of the bloody way