Calculating Asset Depreciation

The value of capital assets with a limited effective life can be expected to depreciate over time and are known as depreciating assets. Claimable asset depreciation can include things such as computers, tools, furniture, carpet, curtains, vehicles or equipment.

If you own a business, chances are you will need to depreciate some form of capital asset. We’ve put together a quick guide to depreciation and the steps you can take to effectively calculate your claim.

There are several rules in place that apply to a variety of depreciated assets and other capital. Generally, the effective life of the asset will govern the number of years over which you divide the cost of the asset in your tax returns.

Several variables can impact our claim. This includes situations in which you:

  • Have owned the asset for less than a year;
  • Only partly use the asset for business; and/or
  • Owned the asset for a period before you began business.

Exceptions do exist to general depreciation rules, including construction costs for capital works such as:

  • Improvements to land including buildings and fences;
  • Structural improvement works; and/or
  • Environmental protection earthworks.

There are two methods you can use to depreciate the value of your asset, it’s best to assess the best method for your situation with a taxation professional.

Prime Cost Asset Depreciation Method

This method assumes the value of an asset decreases consistently over the whole of its effective life. Sometimes referred to as the ‘straight line’ method, you claim a fixed amount each year based on the below formula:

Asset costs x (days held/365) x (100%/assets effective life)

For example, if an asset costs $60,000 (after excluding GST) and has an effective life span of four years, you can claim 25% of its cost, or $15,000 in each of the four years.

This cost includes the amount paid for the asset and any additional amounts paid for transport or installation. Thus:

60,000 x (365/365) x 25% = 15,000

Diminishing Value Asset Depreciation Method

This method assumes the value of an asset decreases more in the early years of its effective life. The formula for this method is:

Base value x (days held/365) x (200%/assets effective life)

This cost includes the amount paid for the asset and any additional amounts paid for transport or installation.

For example, if an asset costs $80,000 with an effective life of five years, the first years’ claim will be:

$80,000 × (365/365) × (200%/5) = $80,000 x 40% = $32,000

The base value reduces each year by the decline in value. This means the base value in the second year will be $48,000 or $80,000 minus the first years $32,000 decline in value. Thus:

$48,000 × (365/365) × (200%/5) = $48,000 x 40% = $19,200

In the third year, the base value will then be $28,800 and the claim will be $11,520.  In the fourth year, the base value will be $17,280 and the claim will be $6,912. This process will continue until the value reaches zero.

The Australian Taxation Office (ATO) has a calculator you can use to compare results of the two methods of asset depreciation.

Need to get on top of your taxes?

Our team of registered tax agents at Online Tax Return can assist you to get caught up, and make the most of, your tax returns this year. Speak with us today to get started!

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.