As a small business owner, it’s important to know about tax depreciation. But beware, there are a lot of myths out there! Our tax experts, Iain Bradley and Veronica Harley are here to set the record straight once and for all. So here are some of the most common tax deprecation myths debunked for you.
Myth #1 – All depreciable assets with a cost of $500 or less can be written off immediately
Not necessarily. It is true that assets with a cost of $500 or less (low value assets) can be written off; however there is an exception where a number of low value assets are acquired at the same time from the same supplier and which have the same depreciation rate. Under the single supplier rule, if the total cost of the low value assets purchased as a group is greater than $500, an immediate write-off cannot be taken and the assets must be depreciated.
Myth #2 – I need to own the asset before I can claim tax depreciation
This is generally correct, although the meaning of “own” is extended beyond the ordinary meaning in certain cases. For example a lessee is deemed to own and is able to claim depreciation on the cost incurred by the lessee on leasehold improvements for tax depreciation purposes. Taxpayers should note that there are a number of conditions that must be met for leasehold improvements to be able to be depreciated for tax purposes. Depreciable property subject to finance leases is deemed to be owned by the lessee and as such the lessee can claim tax depreciation on that finance lease asset.
Myth #3 – I can start to claim tax depreciation on an asset from the purchase date
This statement gives rise to two points. The first is that ownership of the asset is not enough. In order to claim depreciation on an item, it must also be used or available for use in deriving assessable income or in carrying on a business to derive assessable income. Therefore tax depreciation can only be claimed from the point a business has commenced and those assets are used or available for use in that business. If an asset is constructed in-house, depreciation can’t be claimed until the asset is able to be used.
The other point to note here is that tax depreciation is calculated on a monthly basis. Therefore if an asset is purchased on 31 March being the last day of the tax year, one whole month’s depreciation can be claimed. This is because tax depreciation is claimed on a monthly, not daily basis.
Myth #4 – If I forget to claim depreciation in one year, I can claim it in the next
It’s not always that simple unfortunately. The base rule is that an item is deemed to have been depreciated even if a taxpayer neglects to claim a tax depreciation deduction in their tax return. This means the opening balance in the following year is the closing tax adjusted value of the asset as if tax depreciation had been claimed. In this case a taxpayer has the following options.
If a taxpayer wishes to claim a deduction for tax depreciation missed in the prior year’s return, then it can be picked up in the current tax return only if the tax effect of the error is $500 or less.
If the tax effect of the omitted depreciation claim is greater than $500, then the taxpayer can request that the Commissioner amend the prior year’s tax return using section 113 of the Tax Administration Act 1994.
Finally, a taxpayer may decide not to claim the omitted depreciation and simply start to claim depreciation from the current year on the corrected adjusted tax book value.
Which option is appropriate will depend on the quantum of omitted depreciation and any compliance costs involved. We acknowledge that some taxpayers may have adopted a pragmatic approach to dealing with issue historically but it is important to be aware of what the technically correct options are.
If you would like more information about claiming tax depreciation, please call your usual Deloitte advisor.
Iain Bradley is a Deloitte Partner in Tax and Private while Veronica Harley is Associate Director in Tax and Private.