Part L: Depreciation expenses

Warning:

This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

End of attention

Did you have depreciation as a business expense?

You need to know

If you did not carry on a business in the year, but in a prior year allocated assets to a general STS pool or long-life STS pool, do not include the STS pool deductions at M. In such a case, show any allowable STS pool deductions at item D15 on your tax return.

If you are eligible to enter or continue in the STS and have chosen to do so at item S1, read on. Otherwise go to Depreciation expenses for other businesses.

Depreciation expenses for STS taxpayers

You show at M Depreciation expenses item P8 the total depreciation deductions being claimed under the STS depreciation (capital allowance) rules and for the business use of other assets under the uniform capital allowance (UCA) rules. This includes your deduction under the STS depreciation rules for depreciating assets used for work related or self-education purposes. You do not need to complete a Capital allowances schedule 2004.

STS taxpayers can claim an immediate deduction for depreciating assets costing less than $1,000 (excluding input tax credit entitlements) and pool most of their other depreciating assets. There are two STS pools:

• a general STS pool for depreciating assets with an effective life of less than 25 years
• a long-life STS pool for depreciating assets with an effective life of 25 years or more.

Some depreciating assets are excluded from the STS rules but a deduction may be available under the UCA rules. For more information about the STS depreciation rules, refer to the publication The Simplified Tax System – A guide for tax agents and small businesses NAT 6459, phone the Small business infoline on 13 28 66 or visit our website at www.ato.gov.au

Calculating depreciation deductions for STS taxpayers

Note for STS taxpayers: Only use calculations 1 to 5 to work out your depreciation deductions if you are eligible to enter or continue in the STS and have chosen to do so at item S1.

If your accounting system or financial statements provide you with the amounts to complete the table Depreciation deductions, write these amounts in the table. Otherwise, use calculations 1 to 5 below to calculate your depreciation deductions.

The amounts you write in the table 25 must be tax values and not accounting values.

Definitions

Depreciating asset is an asset with a limited effective life which declines in value over that life.

Decline in value (previously 'depreciation') is the value that an asset loses over its effective life.

Adjustable value of a depreciating asset is its cost (excluding input tax credit entitlements) less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

Taxable purpose includes the purpose of producing assessable income.

Taxable purpose proportion is the extent to which you use the asset for a taxable purpose, such as for the purpose of producing assessable income.

Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset. Exclude the GST component where the amount received is for a taxable supply.

Assessable balancing adjustment amount arises where the termination value of the depreciating asset is more than the adjustable value.

Deductible balancing adjustment amount arises where the termination value of the depreciating asset is less than the adjustable value.

Calculation 1: Low-cost assets

For each depreciating asset you acquired this income year and used or held ready for use this year for the purpose of producing assessable income

• whose cost at the end of this year is less than $1,000 (excluding input tax credit entitlements), and
• which qualifies for a deduction under the STS depreciation (capital allowance) rules

work out the extent it is used for the purpose of producing assessable income (taxable purpose proportion). The deduction for each eligible asset is calculated as follows:

asset's adjustable value × taxable purpose proportion

The adjustable value of an asset is its cost less its decline in value since you first used it (or installed it ready for use) for any purpose, including a private purpose. The adjustable value of an asset, at the time you first used it (or held it ready for use) for a taxable purpose, will be its cost, unless you previously used or held the asset solely for private purposes. For example, for a tool set bought on 1 December 2003 at a cost of $800 (excluding input tax credit entitlements) and used for producing assessable income from that date at an estimated 70% of the time, the immediate deduction would be $800 × 70% = $560.

Add up these results and write the total at a in the table.

Do not include in this calculation amounts for depreciating assets that you acquired prior to entering the STS and that cost less than $1,000 (excluding input tax credit entitlements). These assets are allocated to the general STS pool (see calculation 2).

Calculation 2: STS pool deductions

To calculate your deductions for both the general and long-life STS pools you must first calculate the opening pool balance of each pool.

If you are entering the STS, allocate each depreciating asset you hold at the start of the income year to the appropriate pool according to the asset's effective life. Only include the taxable purpose proportion of the adjustable value of each depreciating asset. For example, for an asset with an adjustable value of $10,000, which is used only 50% for an income-producing purpose, only $5,000 will be added to the pool.

You can choose not to allocate an asset to your long-life STS pool if it was first used or installed ready for use for a taxable purpose before 1 July 2001.

The opening pool balance for each STS pool is calculated by adding the value of all depreciating assets allocated to the relevant pool.

If you are continuing in the STS, the opening pool balance of each STS pool is the closing pool balance for the 2002–03 income year, except where an adjustment is made to reflect the changed business use of a pooled asset.

Calculate your deduction for each STS pool as follows:

General STS pool deduction:

opening pool balance ($) × 30%

Long-life STS pool deduction:

Opening pool balance ($) × 5%

Where necessary make a reasonable apportionment for each STS pool deduction between primary production and non-primary production activities.

Write the result of your general STS pool deduction at b in the table.

Write the result of your long-life STS pool deduction at c in the table.

If either pool balance (after taking into account additions and disposals but before working out the deductions in calculations 2 and 3) is below $1,000, you work out the deduction for the pool using calculation 5b.

Calculation 3: Depreciating assets first used for a taxable purpose during the income year and improvements made to assets already allocated to a pool

You calculate your deduction at half the relevant pool rate for:

• depreciating assets that you first used or installed ready for use for a taxable purpose during the year
• improvements made during the year to assets already allocated to an STS pool.

Calculate your deduction as follows:

• the taxable purpose proportion of the adjustable value of each depreciating asset first used for a taxable purpose this year × 15% (general STS pool assets) or 2.5% (long-life pool assets), plus
• the taxable purpose proportion of the cost of the improvement × 15% (general STS pool assets) or 2.5% (long-life pool assets).

Write the total deduction for general STS pool assets at d and the total deduction for long-life STS pool assets at e in the table below.

If either pool balance (after taking into account additions and disposals but before calculating the deductions in calculations 2 and 3) is below $1,000, work out your deduction for these assets using calculation 5b.

Calculation 4: Other depreciating assets

Work out your deduction for the decline in value of all your other depreciating assets that are not included in calculations 1 to 3. See the publication Guide to depreciating assets 2003–04 (NAT 1996–6.2004) for information on how to calculate the decline in value of these assets.

Write your total deduction for other depreciating assets at f in the table.

Do not include at f in the table depreciating assets which qualify for a deduction under Subdivision 40-F or 40-G ITAA 1997 as water facilities or landcare operations in your primary production business and for which you have chosen to claim a deduction under those Subdivisions and not the STS rules. Show these deductions at W Landcare operations and business deduction for decline in value of water facility item P8.

Calculation 5: Disposal of depreciating assets

(a) Low-cost assets

If you have disposed of a low-cost asset, for which you have claimed an immediate deduction in calculation 1 this year or in the prior year, include the taxable purpose proportion of the termination value at the reconciliation items section item P8. For example, for a low-cost asset used only 50% for an income producing purpose which was sold for $200 (excluding GST), only $100 will be assessable and included as a reconciliation adjustment. Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset.

(b) Assets allocated to STS pools

Where you dispose of depreciating assets that have been allocated to either the general or long-life STS pools, the taxable purpose proportion of the termination value is deducted from the closing pool balance. For example, for a pooled depreciating asset used only 50% for an income-producing purpose which was sold for $3,000 (excluding GST), only $1,500 will be deducted from the closing pool balance. If the balance of a pool (after taking into account any additions and disposals but before calculating the deductions in calculations 2 and 3) is below $1,000, you can claim an immediate deduction for this amount. Write this deduction against the appropriate pool at b or c in the table.

If the closing pool balance is less than zero, the amount below zero is included in your assessable income at the reconciliation items section item P8. For more information about closing pool balances, see below.

(c) Other depreciating assets

See the publication Guide to depreciating assets 2003–04 (NAT 1996–6.2004) for information on how to calculate any balancing adjustment amounts on the disposal of other depreciating assets. Balancing adjustment amounts are included at the reconciliation items section item P8. Refer to What are reconciliation adjustments?

Closing pool balance for STS taxpayers

The closing balance of each STS pool for an income year is:

• the opening pool balance (see calculation 2), plus
• the taxable purpose proportion of the adjustable value of assets that were first used or installed ready for use for a taxable purpose during the year (see calculation 3), plus
• the taxable purpose proportion of the cost of any improvements made to assets in the pool during the year (see calculation 3), less
• the taxable purpose proportion of the termination value of any pooled assets disposed of during the year [see calculation 5 b], less
• the STS pool deduction (see calculation 2), less
• the deduction for assets first used by the taxpayer during the year (see calculation 3), less
• the deduction for the cost of improvements made to the pooled assets during the year (see calculation 3).

If your closing pool balance is less than zero, see calculation 5 b.

The closing pool balance for this year becomes the opening pool balance for the 2004–05 income year except where an adjustment is made to reflect the changed business use of a pooled asset.

You will need your opening pool balance to work out the pool deduction next year. Do not write your closing pool balance on your tax return.

Depreciation expenses for other businesses

You need to know

You show at M Depreciation expenses item P8 the depreciation claimed in your books of account other than for those assets allocated in a prior year to a general STS pool or a long-life STS pool. For assets allocated to such a pool, include at this part the amount of the pool deduction to be claimed for tax purposes. Information about STS depreciation deductions is available above.

The depreciation amount shown at M should not include profit or loss on the sale of depreciating assets. Profit on the sale of depreciating assets should be included in Other business income at I or J in the INCOME section item P8 on your schedule. Loss on the sale of depreciating assets should be included at P All other expenses in the EXPENSES section.

Accounting or book depreciation may differ from the deduction for the decline in value of depreciating assets.

The reconciliation between accounting depreciation and the deduction for decline in value is carried out at H Expense reconciliation adjustments in the reconciliation items section. See the publication Guide to depreciating assets 2003–04 (NAT 1996–6.2004) for information on the deduction for decline in value.

Note: Is expenditure revenue or capital?

Practice Statement PS LA 2003/8 Practical approaches to low-cost business expenses provides guidance on two straightforward methods which can be used by taxpayers carrying on a business to help determine whether expenditure incurred to acquire certain low-cost items is to be treated as revenue or capital.

Subject to certain qualifications, the two methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost items. The threshold rule allows an immediate deduction for qualifying low-cost business items costing $100 or less. The sampling rule allows taxpayers with a low-value pool to use statistical sampling to determine the proportion of the total purchases on qualifying low-cost business items that are revenue expenditure.

A deduction for expenditure incurred on low-cost assets calculated in accordance with this Practice Statement will be accepted by tax officers.

In all other cases leave the CODE box blank.