What is the straight-line method of depreciation?

BMT team — Wed, 01 Sep 2021 06:17:19 +0000

Tax depreciation is a complex topic, with different factors contributing to how and when it can be claimed. The straight-line method of depreciation is just one approach to claiming depreciation. But what is it and how does it maximise cash? What is depreciation? Before we start talking about the straight-line method, let’s first explore depreciation. Property and assets experience natural wear and tear over their lifetimes – they depreciate. Owners of income-producing properties can claim this depreciation on eligible assets each financial year as a tax deduction. Depreciation can be claimed on either capital works or plant and equipment assets. Capital works is claimed on the structure of the building and fixed assets like door handles, windows, fences and built-in cupboards. Plant and equipment assets are those that are easily removable or mechanical in nature such as furniture, air-conditioning units, window coverings and light fittings. Depreciation works like any other tax deduction. It reduces an investor’s income, so they pay less tax. But the major perk is that unlike any other investment property tax deductions, no money needs to be spent to claim depreciation. What is the straight-line method of depreciation? So, how much depreciation can be claimed? This depends on the asset type, value and the method of depreciation that is chosen. Capital works depreciate at a set rate of 2.5 per cent over forty years. For example, a built-in wardrobe valued at $2,600 would produce a full year depreciation deduction of $65. It works differently for plant and equipment assets. Every plant and equipment asset has its own effective life, which determines the rate it depreciates using one of two methods. The first is the diminishing value method, and the second is the prime cost method – also known as the ‘straight-line method’ of depreciation. The diminishing value method calculates deductions as a percentage of the asset’s depreciable balance. This means deductions are higher in earlier years. The prime cost method calculates deductions each year as a percentage of the asset’s cost. The result is that deductions are spread out over time with a more even claim each financial year, forming a straight line over time. The equation for the prime cost (straight line) method, as defined by the Australian Taxation Office, is as follows: Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life) For example, carpet has an effective life of eight years resulting in a prime cost depreciation rate of 12.5 per cent. This means carpet valued at $5,000 would produce a full financial year depreciation deduction of $625. Below are visual representations of the straight-line method applied to carpet depreciation. Who should consider using the straight-line method of depreciation? Investors can choose to depreciate a plant and equipment asset using either the diminishing value or prime cost (straight line) method. Once a method is chosen for an asset, it can’t be changed. The vast majority of investors choose the diminishing value method of depreciation as it results in higher deductions in earlier years. However, the choice should always come down to an investor’s investment strategy. For example, the prime cost method may be more suitable for a long-term investment strategy as it produces consistent deduction each financial year. Who can assist when deciding which method of depreciation to use? The depreciation experts at BMT Tax Depreciation know how to correctly apply all methods of depreciation. A BMT Tax Depreciation Schedule shows the deductions available using both diminishing value and prime cost (straight line) methods of depreciation. This way an investor can go over their schedule with their accountant to help determine the best method to use for their plant and equipment assets. To learn more about depreciation and how a BMT Tax Depreciation Schedule can ensure you choose the best method for your investment strategy, Request a Quote or contact the team on 1300 728 726.

The post What is the straight-line method of depreciation? appeared first on .

Depreciation methods that mean more for you

BMT team — Tue, 01 Mar 2016 05:08:19 +0000

Learn how the experts maximise deductions Many investors ask the question, ‘Why can’t I just do it myself or ask my Accountant to claim depreciation deductions on my investment property?’ The answer is simple. Quantity Surveyors who specialise in depreciation have the recognised qualifications, skills and specialist knowledge of the depreciation methods available to help property investors maximise their deductions. The Australian Taxation Office recognise Quantity Surveyors under tax ruling TR/97 with the appropriate knowledge to estimate construction costs for depreciation purposes. However, not all Quantity Surveyors are created equally. A tax depreciation quantity surveying firm, will use their skills to accurately calculate depreciation deductions for investment property owners. This helps to ensure owners can claim maximum returns for the lifetime of ownership. How do Quantity Surveyors do this? To demonstrate how the depreciation methods a specialist Quantity Surveyor uses can make a difference to an overall claim, let’s look at immediate write-off and low-value pooling. These are two depreciation methods which assist in accelerating deductions for some plant and equipment assets found in a typical residential property. Immediate write-off An immediate write-off can be applied to any plant and equipment asset which costs $300 or less within the first year of ownership, regardless of how many days the property is owned in that year. This means the owner can claim the total value of the individual asset within the first financial year, instead of claiming depreciation over the effective life of the asset. Low-value pooling This depreciation method allows some plant and equipment assets to be depreciated at an increased rate, allowing owners to take advantage of deductions sooner. There are two categories of assets which can be added to a low-value pool: Low-cost assets – depreciable assets which have an opening value of less than $1,000 in the year of purchase Low-value assets – depreciable assets that have a written down value less than $1,000. That is, the value of the asset was greater than $1,000 in the year of purchase. However, the remaining value after a previous year’s depreciation is less than $1,000 By adding these assets, investors can claim deductions for these items at a rate of 18.75 per cent in the first year of purchase and at a rate of 37.5 per cent from the second year onwards. It is important to note that once an investor adds items to a low-value pool, they must apply this depreciation method to all assets. Similarly, if an investor chooses not to pool assets, they must continue to claim deductions using either the diminishing value or prime cost depreciation methods. These rules become even more complicated when a property has more than one owner. A specialist Quantity Surveyor can prepare a split depreciation schedule in a shared ownership scenario which allows each owner to claim the deductions for their portion of interest in each asset. This can mean more assets will qualify to be written off immediately or added to a low-value pool, further maximising the deductions which can be claimed. These are just two of the depreciation methods a specialist Quantity Surveyor uses to ensure owners can claim maximum returns. Which one you chose depends on your personal investment strategy so it’s always best to contact your Accountant or Financial Adviser to discuss your situation.

The post Depreciation methods that mean more for you appeared first on .

» tax depreciation method

What is the straight-line method of depreciation?

Depreciation methods that mean more for you