1. Homework review 2. Lesson 4 Depreciation 3. Q+A

Transcription

1 1. Homework review 2. Lesson 4 Depreciation 3. Q+A

2 DEPRECIATION

3 Depreciation is the decline in value of an asset over time. Depreciation of certain assets can be deductible.

4 Private or domestic expenses are never deductible. However, certain capital expenses can be depreciated. This include things such as: Motor vehicles Computer equipment Houses Things such as couches, lawnmowers and clothing are not depreciable (unless these items are used to produce income instead of being used privately).

5 A decline in value may be claimed by any individual using depreciable items to produce income. In all circumstances bar one, the taxpayer must own the item to claim depreciation. The only exception to this is hire purchase agreements.

6 There are two methods for calculating the decline in value of an item. These two methods are: 1. Prime cost method Equal instalments of depreciation over the life of the asset, i.e. 10% depreciation for each and every year of an asset with a lifespan of 10 years. 2. Diminishing value method The decline in value of an asset is a constant proportion of the remaining (diminishing) value.

7 Prime cost method Asset's cost x days held x 100% 365 effective lif An asset with an effective life of four (4) years will be depreciated by 25% of its value each year for four (4) years. After that, the value of the item will be $0 (nil). The example on the right was completed with the assumption that the asset was owned for 365 days in the first year and every other year. Beginning of year 1 - $10,000 Depreciation of year 1 - $2,500 Adjusted value of year 1 - $7,500 Depreciation of year 1 - $2,500 Adjusted value of year 2 - $5,000 Depreciation of year 2 - $2,500 Adjusted value of year 3 - $2,500 Depreciation of year 3 - $2,500 Adjusted value of year 4 - $0 (nil) Depreciation of year 4 - $2,500

8 Diminishing value method An asset with an effective life of four (4) years will be depreciated by 50% of each year's adjusted value. After four (4) years, the value will not have reached $0 (nil) and will still have some value. The example on the right was also completed with the assumption that the asset was owned for 365 days in the first year and every other year. Base value x days held x 200% 365 effective life Beginning of year 1 - $10,000 Depreciation of year 1 - $5,000 Adjusted value of year 1 - $5000 Depreciation of year 1 - $2,500 Adjusted value of year 2 - $2,500 Depreciation of year 2 - $1,250 Adjusted value of year 3 - $1,250 Depreciation of year 3 - $625 Adjusted value of year 4 - $625 Depreciation of year 4 - $2,500 Adjusted value at end of year 4 - $625

9 A photocopier was purchased for $10,000 on the 1st July 2015, with an effective life of 5 years. $10,000 x days owned asset x 200% no. of days in the year effective life years $10,000 x 366/366 x 40% = $4,000(decline in value) $10,000 - $4,000 = $6,000 (closing written down value) $6,000 becomes the opening written down value for next financial year

10 If an asset is used for both private and business/work purposes, the percentage of each usage must be worked out. If an asset is used for 50% private use and 50% work use, then only 50% of the depreciation is claimable. Photocopier $10,000 x 366/366 x 40% = $4,000 $4,000 x 50% private use = $2,000 $4,000 - $2,000 (private use) =$2,000 (claimable amount in tax return)

11 Assets not owned for the full year will be adjusted accordingly. This will be done with the following part of each equation for calculating depreciation: Photocopier purchased 1st January 2016 $10,000 x 182/365 x 40% = $1, Rounded to $1, (decline in value) The day on which an asset is purchased counts as a day of ownership. This goes for the date of selling the asset as well.

12 If an asset was previously owned but not used for work purposes, then it will be necessary to calculate an adjustable or written down value from the date of original acquisition to the date first used by the current owner. Photocopier purchased 1st January st Year $10,000 x 182/365 x 40% = $1, $10,000 - $1,995 = $ (CWDV) 2nd Year $8,005(OWDV) x 366/366 x 40% = $3, $8,005 - $3,202 = $ (CWDV)

13 Disposal, loss or destruction of depreciated property (if no private use) If the property was sold during the year, you must first calculate the depreciation up to the point of sale. Next, compare the adjusted value at the date of sale with the consideration received. Finally, work out the balancing adjustment (profit or loss). Any form of profit made from a sale is assessable income.

14 Profit on Sale of Asset Photocopier purchased 1st January st Year $10,000 x 182/365 x 40% = $1, $10,000 - $1,995 = $ (CWDV) 2nd Year $8,005(OWDV) x 366/366 x 40% = $3, $8,005 - $3,202 = $ (CWDV) Sold Photocopier on the 30th June 2016 for $5,000 Sale price - Closing Written Down Value $5,000 - $4,803 = $ Assessable income $ needs to be claimed at 24Y on your tax return

15 Loss on Sale of Asset Photocopier purchased 1st January st Year $10,000 x 182/365 x 40% = $1, $10,000 - $1,995 = $ (CWDV) 2nd Year $8,005(OWDV) x 366/366x 40% = $3, $8,005 - $3,202 = $ (CWDV) Sold Photocopier on the 30th June 2016 for $3,000 Sale price - Closing Written Down Value $3,000 - $4,803 = $1, Deductible amount $ can be claimed at D5 on your tax return

16 Depreciation rate and cost limit of cars Cars purchased after 1 JULY 2002 have an effective life of 8 years. The current rate of depreciation for cars is 25% under the diminishing value method and 12.5% for the prime cost method. There is a limitation placed on the 'cost' of a car for which depreciation can be claimed for. The current cap for 2015/16 is $57,466 and for 2016/2017 $57,581. When a car's cost is above this cap, the amount above the cap is not included in any depreciation calculations. The depreciation limit applies to the cost of the car in the year it was purchased. Different figures applied to car purchases in previous years.

17 Example 8 A car was purchased in March 2014 for $70,000. The car can only be depreciated at the limit of $57,466 (2016/2016) and NOT the full $70,000.

18 Immediate deductions An immediate deduction for an asset can be claimed despite it being capital in nature if: The cost of the depreciating asset is less than $300 You use the asset to produce income that is not from carrying on a business The asset is not a part of a set that would be worth more than $300 The item is not identical or substantially identical items that would, altogether, be worth more than $300.

19 Low-cost pool Taxpayers have an option to pool all items less than $1,000. However, once this choice is made, the items must stay in the pool for the coming years.

20 Substantiation requirements are the same for depreciation as they are for deductions and expenses. ALL substantiation documents must be kept for a minimum of 5 years.

21 The depreciation worksheet

22 Homework Review today's notes Complete review questions for this lesson Complete the tax return examples on the paper copies of the return keep these for the computer component lesson