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

Transcription

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

2 HOMEWORK

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 2. Diminishing value method The decline in value of an asset is a constant proportion of the remaining (diminishing) value. 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.

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 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.

10 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: Days held 365 So if an item was held for only two hundred (200) days of a year, it will show: 200 = The result of this calculation will be multiplied against the rest of the formula as 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. If a person purchased an asset on the 1 st of March and sold it on the 31 st of March, this would mean the person held the asset for 31 days.

11 If an asset was previously owned by someone else other than the current owner, 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.

12 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.

13 Example 5.2 A photocopier was sold for $4,000. Opening written down value is $8,011 (after taking off the previous year's depreciation from Example 3).

14 Example 5.2 epreciation for the current year = pening written down value x Days held x 200% Days in the year Effective life 8,011 x 365 x 200% 8,011 x 365 x 5 $8,011 x 1 x 40% epreciation for the current year = $3,204.40

15 Example 5.2 Closing written down value = OWDV depreciation = $8,011 - $3, = $4, at 30 June 2014 Balancing adjustment = CWDV termination value (sale) = $4, $4,000 Deductible amount = $807 (rounded up from $806.60)

16 When an asset is disposed of, the balancing adjustment must be reduced by the amount attributed to private use of the asset over the period of ownership.

17 Example 6 An asset is purchased for $30,000 and is sold for $19,000. The adjustable value of the asset at the time was $19,664. Upon applying the balancing adjustment, the total difference is $664. The private use of the asset must be accounted for. As it was 20% private use, 20% of $664 must be taken away like this: $664 x.80 = $ (Business Use) $664 x.20 = $ (Private Use) The.80 shows 80% of the use of the asset was for income purposes. The remaining.20 is indicative of the private use.

18 When a car's cost is above this cap, the amount above the cap is not included in any depreciation calculations. 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 $63,184.

19 Example 8 A car was purchased in March 2014 for $70,000. The car can only be depreciated at the limit of $61,884 (2014/2015) and NOT the full $70,000.

20 Fuel efficient cars have a limit of $75,375 for the 2014/15 and 2015/16 financial years.

21 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.

22 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.

23 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.

24 The depreciation worksheet

25 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