We are all aware of the different factors that can affect how much an investor can claim in depreciation deductions.
The two major points on this topic include the age of the property and whether it’s affected by the 2017 legislation changes. Surprisingly, the effective lives of assets aren’t usually discussed.
Understanding the effective lives of assets is one thing that can help property investors claim more from their investment, while ensuring they are purchasing assets that align with their investment strategy.
Effective life determination
The Australian Taxation Office (ATO) has the final say on the effective lives of plant and equipment assets. This determines how long an investor can use the asset for taxable purposes, including claiming depreciation deductions.
BMT insights – depreciation method vs effective life
No matter the effective life of an asset, an investor will still have two options when deciding how to depreciate it. With over twenty years of experience, BMT has seen investors use the methods in different ways.
One method is prime cost, which calculates deductions at a uniform rate.
The second, and most popular method is diminishing value. This determines deductions at an accelerated rate based on the asset’s effective life. Using the diminishing value method means the investor gets higher deductions in earlier years of ownership.
While the prime cost method may appear to be the best match for a long-term property investment strategy, it’s not always the chosen method. In fact, BMT insights reveal that the diminishing value is the most popular method as it results in higher deductions earlier when the investor has a larger fiscal outlay.
Some investors also like to mix their depreciation methods up.
For example, for their ‘big ticket’ plant and equipment assets, like air-conditioning units and floor coverings, they may choose to use the prime cost method as they will see substantial deductions each year, while lower value assets like furniture may be depreciated using the diminishing value method. The higher first-year deduction that the diminishing value method provides sometimes results in the asset being placed into the low-value pool in subsequent years.
BMT insights – changes to effective life of assets
BMT Tax Depreciation always analyses the tax rulings released each year to ensure depreciation can be claimed compliantly.
The latest tax ruling saw some effective life changes to assets across certain commercial industries. Some of the common industries included in these tax rulings are manufacturing, the retail trade, mining and much more.
The commercial landscape is constantly changing, and this is what triggers the changes to commercial asset effective lives.
The same can’t be said for the residential market and it shows in the rarity of these changes. In fact, tax ruling 2019/5 was the first residential effective life change in 14 years. This change was made following BMT’s submission to the ATO that recommended some more practical effective lives to specified assets.
BMT site inspections maximise claims
BMT works with yourself and your investor clients to ensure deductions are maximised to their full potential. BMT continue to complete physical site inspections Australia wide to ensure that claims are tax office compliant and risks are minimised.
Visit our accountants page to learn more about BMT and find free resources that you can share with your clients and team.