Despite the turmoil of COVID-19, the 2019-2020 financial year welcomed more Australian business entries than exits.
New business owners need to get on the front foot early and do what they can to maximise their cash flows. To do this they should optimise all available tax deductions, including one of the most lucrative deductions – depreciation.
In this article, we will cover:
- What can be depreciated in a business
- Categories of depreciable business items
- What happens if the business isn’t the owner of the property
- Incentives on offer
What can be depreciated in a business?
Property investors and businesses are the only two groups that can claim depreciation as a tax deduction.
Thousands of items can be depreciated in a business. To be eligible, items must fit into the categories of depreciation, and be used wholly or partially for business purposes.
Categories of depreciable items in a business
There are only two categories of depreciation, capital works and plant and equipment. An item’s category significantly changes how it is depreciated in a business.
The first category is capital works. This covers property structure and fixed assets. For example, a business property’s walls, doors, windows, sinks and mezzanines. Depending on the business’s industry, the capital works items will depreciate at a set rate of 2.5 or 4 per cent.
The second and arguably more complex category of depreciation is plant and equipment. This group includes the easily removable or mechanical assets that a business holds. These may include floor coverings, furniture, manufacturing equipment, commercial ovens, vehicles and blinds.
No ‘set rate’ of depreciation is available to plant and equipment assets. Each asset has a designated effective life, which informs the depreciation rate.
Interestingly for businesses, the rate for the same asset can change across industries. For example, a dishwasher in a child care centre has the effective life of five years, while a dishwasher in a supermarket has an effective life of ten years.
What if the business isn’t the owner of the building?
When we talk about depreciation, property and assets are discussed concurrently. But what happens if a business doesn’t own the property they operate from?
The good news for commercial tenants is that they can claim depreciation on their fit-out and any other assets they own.
For example, if a café owner leases their premises but purchases all equipment associated with the business, they can still depreciate these assets just not the property’s structure. In this scenario, assets that could be depreciable include kitchen appliances, furniture, cabinetry and floor coverings.
Depreciation incentives on offer for businesses
Assets can be depreciated in a business using a huge incentive called temporary full expensing.
Temporary full expensing is available to most businesses with an aggregated turnover of up to $5 billion. Under the policy, business can instantly deduct the full cost of a plant and equipment asset purchased between 7.30pn on 6 October 2020 and 30 June 2023. There’s no limit to the amount of assets a business can claim under the incentive, as long as they and the asset is eligible.