Successful business owners make the most of what is available to them. Through the peaks and troughs of operating a business, owners may at times find themselves relying on tax deductions.
Tax deductions are almost always the result of incurred expenses. Depreciation is the only exception, meaning no money needs to be spent to claim it. To take advantage of it, a business needs a depreciation schedule.
In this article, we discuss:
What is depreciation and how does it boost the cash flow for landlords and tenants who run a business?
Depreciation is the natural wear and tear of a property and assets over time. Businesses can claim depreciation as a tax deduction on the active business assets and property they use.
What is a depreciation schedule for a business and why do businesses need them?
A tax depreciation schedule is critical to claiming the maximum amount of depreciation deductions accurately.
A tax depreciation schedule is prepared by a specialist quantity surveyor, and it outlines all depreciation deductions available for the lifetime of the business’s assets.
Both capital works and plant and equipment deductions will be outlined in the schedule.
Capital works are claimable for anything that is structural or fixed, like a physical building or fixed assets such as door handles and sinks. Plant and equipment deductions can be claimed on easily removable or mechanical assets like vehicles, furniture and tools.
Once the schedule is prepared, a business owner can take it to their accountant who will use it each tax time to determine the depreciation deductions available to them.
What happens if the business changes location and updates their fit-out?
Two key things happen from a depreciation perspective when a business changes location and updates their fit-out:
1. Scrapping: They can ‘scrap’ the fit-out that they disposed of. Scrapping is the taxation process of writing off the residual depreciable value of removed assets and claiming it as an instant deduction.
For example, if a business disposed of floor coverings that held a residual depreciable value of $1,000, they could claim it as an instant deduction in the same financial year for the loss incurred after performing a balancing adjustment calculation. But to claim this effectively a tax depreciation schedule must have been prepared sometime before the disposal.
2. New schedule: If the business owner has installed an updated fit-out in their new location, they will need to obtain a fresh tax depreciation schedule.
A specialist can prepare this and conduct a site inspection at their new location to ensure the schedule is prepared accurately and depreciation can be claimed to its full potential.
How is a tax depreciation schedule for a business different to one for a residential property investor?
The two key groups that can claim depreciation are property investors (both commercial and residential) and business owners. This is because their activities meet the requirement of using property and assets to produce income.
But it’s important to note that a depreciation schedule is very different for a business than it is for an investor.
While the fundamentals are the same, with both parties able to claim deductions for the assets they own at the property, business tax depreciation has further intricacies.
Firstly, a business tax depreciation schedule applies industry-specific legislation. This means not only does an asset depreciate differently compared to if it was in a residential house, but depreciation can also change based on the industry it’s located in.
For example, freestanding furniture in a retail store holds an effective life of ten years, while freestanding furniture in a pub’s drinking area has an effective life of five years. To make things even more complicated, if the same freestanding furniture (chairs, for instance) was instead located in a pub’s dining area such as the bistro, its effective life varies again to be eight years.
Further industry-specific depreciation rules, such as primary production depreciation can be applied to unique industries. For example, primary producers (farmers) can claim special depreciation rules on certain assets used for their operations including fencing, fodder storage, water facilities and horticultural plants.
Legislative requirements that apply to residential properties and not businesses also exist. For example, 2017 legislation changes that disallow some second-hand property owners to claim depreciation on previously used plant and equipment assets doesn’t apply to businesses. This means a business owner can claim depreciation on second-hand assets.
Businesses also avoid legislation that disallows residential property owners to claim depreciation on capital works construction before 15 September 1987. Instead, businesses have an extra five years and can claim any capital works constructed from 20 July 1982.
When preparing a business tax depreciation schedule, BMT will ensure that every government incentive the business is eligible for is anticipated and included when preparing the schedule. This includes temporary full expensing and the backing business incentives.
Now that you know what a depreciation schedule is for a business, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote to learn more.