Plant and equipment assets are given an ‘effective life’ to work out their decline in value for tax depreciation. In both residential and commercial properties, different plant and equipment assets that perform the same task may have different effective lives. For instance, the effective life of carpet is 8 years while for floating timber flooring it is 15 years.
BMT Tax Depreciation often work with the Australian Taxation Office (ATO) setting and adjusting the effective lives of plant and equipment (Division 40) assets.
But in commercial properties, the same type of plant and equipment asset can have a different effective life across various industries. For instance, the effective life of carpet in a retail store is 8 years whereas it is 5 years in a café.
Here, we outline some of the differences in the effective life of commercial depreciating assets across industries.
- What is property depreciation?
- What is an effective life?
- Air filtration systems
- Hot water systems
- Water tanks
What is property depreciation?
Depreciation is a tax deduction claimed for the natural wear and tear of an income-producing building and its assets over time.
There are two types of deductions. Capital works deductions (Division 43) are the building’s structure and items that are permanently fixed to the property. Plant and equipment depreciation (Division 40) are items in which are easily removable from the property or are mechanical in nature.
Claiming capital works deductions is relatively straightforward. Capital works deductions can be claimed at a constant annual rate based on the historical cost to build the property excluding plant and equipment.
Calculating plant and equipment depreciation is more complex. Each asset’s condition, quality and ‘effective life’ determine the allowances available.
What is an effective life?
The effective life of an asset, as deemed by the Australian Taxation Office, is how long the asset can be used to produce income.
Assets that perform similar jobs can have different effective lives, such as the example of carpet and floating floorboards mentioned previously. Where things get more complex is when assets that perform the same job have a different effective life in one commercial industry compared to another.
The reason for this is the effective life of a fixture or fitting can be impacted by frequency, intensity level and purpose for which it’s used. Here are some examples:
Air filtration systems
Air filtration systems have different effective lives in pharmaceutical manufacturing and sewerage services.
An air filtration system required to perform in pharmaceutical manufacturing would need to be at a medical grade level to filter the air from the substances used for pharmaceutical production, which results in a shorter effective life.
Sewerage and drainage services, while still important, wouldn’t need to filter such strong substances that can cause greater wear and tear on the air filtration system, resulting in a longer effective life.
From this table, blowers have an average effective life of 15-20 years.
In the industries where a blower is used more often, the effective life is shorter. In waste treatment and disposal services the effective life is 7.5 years, which could be due to the asset being used significantly more and for heavier or denser substances.
Determining the effective life of an excavator can be difficult due to the various factors that impact the outcome. These factors include more obvious components such as size, industry and weight of the load. But also, less obvious factors such as the type of excavation being undergone can result in different depreciation rates.
Similarly, to the previous assets, we can see how in a neighbouring industry of waste remediation and materials recovery there is a five-year effective life for an excavator. This is considerably shorter than other industries. This may also be due to the substances within the load damaging the asset quicker along with weight and frequency of use.
Hot water systems
There is a two-year difference in the effective lives of hot water systems across industries.
Water tanks are one asset with very varied effective lives across industries. Many factors can impact this, such as the material of the tank, the size and especially what it’s used for. If a water tank is only used for fire prevention, then it will have a shorter effective life than one used for water supply. This is due to the high level of structure and efficiency required for a fire prevention asset.
Temporary full expensing
The temporary full expensing policy is available for businesses with an aggravated turnover of less than five billion to claim the full cost of eligible plant and equipment assets purchased between 7.30pm on 6 October 2020 and 30 June 2023.
For businesses with an aggregated turnover of less than $50 million, temporary full expensing also applies to the business portion of eligible second-hand depreciating assets.
There is no capped limit on the number of assets that can be claimed under full expensing.
Assets first used or installed ready for use from 12 March 2020 until 30 June 2021 and purchased by 31 December 2020 are eligible for instant asset write-off, with a threshold of $150, 000 and covers businesses with an aggregated turnover of less than $500 million.
The backing business investment measure has also been introduced to support business investment and economic growth by accelerating depreciation deductions, business with an aggregated turnover of less than $500 million are eligible. Assets eligible for this policy must be new, first held on 12 March 2020 until 30 June 2021 and not applied in the temporary full expensing or instant write-off rules.
Understanding commercial depreciation can be tricky, but luckily BMT Tax Depreciation know all the ins and outs. To learn more about depreciation across different industries, contact BMT on 1300 728 726 or Request a Quote.