There is no doubting that depreciation is a complicated area of taxation.
What makes it even more complex is that the Australian Taxation Office (ATO) releases tax rulings every financial year that affect the effective life of assets and can include additional industries.
What is an effective life of an asset?
Before we go into details of the latest tax ruling, it’s important to understand what exactly this ruling impacts.
One of the categories of depreciation is plant and equipment. These assets are easily removable or mechanical in nature. Some common commercial examples include partitions, air conditioning units, desks and computers.
A plant and equipment asset depreciates at a rate based on its effective life. The effective life and depreciation rate can change across industries and how an asset is used.
|In practice: Depreciation using an effective life
Bill owns a restaurant and purchased a new commercial dishwasher for $8,000.
The dishwasher has an effective life of 5 years and diminishing value rate of 25 per cent.
This results in Bill receiving a first-year depreciation deduction of $2,000 for the dishwasher.
Meanwhile, a dishwasher in a residential investment property has an effective of 8 years, but holds the same diminishing value rate of 25 per cent.
What is a tax ruling?
A tax ruling is an important part of Australia’s taxation framework. Only the tax commissioner (the ATO) can make tax rulings and they can be either a public, private or oral ruling.
A recent ruling, named Taxation Ruling 2020/3 (TR 2020/3) was announced at the beginning of this financial year and is a public ruling. This tax ruling replaces the previous year’s ruling (Tax Ruling 2019/5). You can download the full ruling here.
Tax ruling 2020/3 overview
In effect from 1 July 2020, there are two key areas that this ruling focuses on:
1. Effective life of depreciating assets
TR 2020/3 made some changes to the effective life of several assets across industries. Some of the industries that are often included in these tax rulings include manufacturing, retail trade, mining, and much more.
2. Addition of industries
It is important that assets are depreciated correctly across commercial industries.
For example, you wouldn’t depreciate carpet in a café at the same rate as carpet in a dentist’s office, as cafés experience higher foot traffic. This means that café carpet depreciates in value much faster.
The ATO recognises this and has included a number of new, niche categories in TR2020/3 to better suit some industries, including:
- Aircraft manufacturing and repair services
- Childcare services
- Funeral, crematorium and cemetery services
- General practice medical services
- Supermarket and grocery stores.
BMT’s rate finder tool makes it easy to find out the effective life and depreciation rate of all types of assets across different industries. Rate finder has been updated with all changes from TR 2020/3, click here to start using rate finder today.
|In practice: Addition of industries
Sally is a childcare operator and runs a small centre for children aged between 0 and 5.
In the past, Sally was able to claim depreciation on her business assets, but under a different category such as the broad category of ‘education and training’.
While the depreciation deductions she received were beneficial, she felt the effective life of assets weren’t fit-for-purpose. For example, her centre’s toys would depreciate much quicker than the same toys in a middle school, but they still had the same effective life.
However, TR 2020/3 introduced a new ‘childcare services’ category. This means very specific assets such as toys, tricycles and strollers that Sally’s business holds can now be depreciated to their respective effective lives.
Under the microscope: TR2020/3 for general practice medical services assets
An interesting category named ‘general practice medical services’ was included as a new addition in TR2020/3.
The new general practice medical services is a sub-category under health care and social assistance. Some sub-categories alongside general practice medical services include hospitals, podiatry services and optometry.
The assets that have been included in general practice medical services may have been moved from other areas or added with a new effective life. For example, wheelchairs in hospitals hold an effective life of ten years, while wheelchairs in general practice medical services have an effective life of eight years.
BMT Tax Depreciation is the commercial specialist
BMT Tax Depreciation has been the commercial depreciation specialist for over twenty years. BMT has completed thousands of tax depreciation schedules across all types of commercial industries including manufacturing, agriculture, medical services and hospitality.
BMT apply every applicable tax and depreciation ruling to their comprehensive schedules. To learn more, Request a Quote or contact BMT on 1300 728 726.