DEPRECIATION
Depreciation
effectively provides you with a deduction for capital expenditure, where capital
expenditure is not normally deductible.
Depreciation is an allowance that acknowledges the fact your business
assets eventually wear out or become out of date, even though you routinely
maintain and repair them. For
tax purposes, the reduced value of an asset is recognised by allowing a
deduction against income for the depreciation of that asset from the time it is
used in a business until it is sold, disposed of or discarded.
The end result is that the cost of the asset will be written off over its
useful life. Once the whole
cost price of the asset has been written off, no further deduction is allowed.
| Depreciation
deductions are now a statutory right and it is mandatory for you to make
depreciation deductions each year, unless you elect that particular assets
are not to be treated as depreciable assets. |
| You
may only claim a depreciation deduction once the asset is owned by you and
is used or available for use in deriving your gross income or in carrying on
a business that aims to generate your gross income |
| Depreciation
rates are set by the Inland Revenue Department.
However you are able to apply for a higher or lower special
depreciation rate if you can establish that the general rate is not suitable
for your particular circumstances. |
| Depreciation
is calculated according to the number of months in an income year you own
and use the asset. A
daily basis applies to certain assets used in the petroleum industry. |
| You
may not claim depreciation in the year you dispose of any asset, unless that
asset is a building. |
| Expenditure
for repairs and maintenance can be claimed as a deduction through business
accounts. Anything more than repairs or maintenance is
capital expenditure and is not deductible, but will be subject to normal
depreciation rules. |
| Both
straight line and diminishing value methods are available for calculating
depreciation on most assets and you are able to switch freely between the
two. |
| Subject
to certain rules, assets costing $200 or less can be written off in the year
of purchase or creation. |
| Gains
on sale or disposal must be recognised in the year of sale.
Losses on sales of depreciable assets, other than buildings, are
deductible in the year of sale. |
| There
are restrictions on the depreciation deductions that can be made to
depreciable assets transferred between associated parties. |
| As
from 1 April 1997, only those companies that are 100% commonly owned and
that choose to consolidate will be able to transfer assets within the group
at the assets adjusted tax value.
Wholly owned companies who do not form a consolidated group are
required to transfer assets at market value and recover or claim a loss of
depreciation as applicable. |
| You
can apply to write off the residual value of any depreciable asset that you
no longer use to derive gross income. |
| Some
assets cannot be depreciated for income tax purposes either because they are
specifically exempted (e.g. land, trading stock) or they do not reduce in
value over time (e.g. Lotto Franchise fees). |
Although
it is mandatory for you to claim a depreciation allowance, there can be
instances where you may not want to.
If you do not want to claim depreciation on an asset, and you want to
avoid the situation whereby you end up paying tax on depreciation recovered ,
you should elect not to treat the asset as a depreciable asset.
You
are not permitted to pick and choose the years in which you depreciate an asset.
However, if an asset periodically will be and then won’t be used in
your business (such as a residential building that is temporarily let), you may
choose whether or not to depreciate the asset in respect to each period.
If
you elect not to depreciate your asset, it will no longer be a depreciable asset
and the depreciation recovery or loss on sale provisions will not apply to it.
ASSETS
THAT DO NOT DEPRECIATE
Some
assets do not depreciate for tax purposes.
These assets include:
| Assets
that you have elected to treat as not depreciable. |
| Trading
stock |
| Land
(except for buildings, fixtures or land improvements) |
| Financial
arrangements under the accrual rules |
| Intangible
assets e.g. goodwill |
| Low
value assets (costing less than $200) that are written off on full on
acquisition |
| An
asset whose cost is allowed as a deduction under some other tax provision |
| An
asset which does not decline in economic value because of compensation for
loss or damage. |
A depreciation deduction for a particular asset is only allowed once you own the asset and it is used or available for use in deriving your gross income or in carrying on a business that aims to generate your gross income. Therefore to claim a depreciation deduction for an asset, you must:
| Own
it, or |
| Lease
it under a specified lease, |
| Be
buying it under a hire purchase agreement. |
Generally, the
cost of an asset is the consideration paid by the purchaser, that is, the market
value, and this principle applies to associated persons.
If you inherit depreciable assets, there can be no depreciation for cost
price, because there has been no cost to you.
For income tax
purposes a deduction is not ordinarily available for expenses incurred in
acquiring a capital asset. This
includes any duties paid when purchasing business assets, legal fees charged by
solicitors, real estate agent fees for property purchases etc.
However, this type of expenditure may be added to the cost of the asset
purchased when calculating depreciation on that asset.
The depreciation you calculate each year is deducted from the value of your asset. The remaining value of your asset is called the asset’s adjusted tax value (or written down value)
GST
AND DEPRECIATION
If you are
registered for Goods and Service Tax (GST) you can generally claim a credit for
the GST part of an asset’s cost price.
You calculate depreciation on the GST exclusive price of the asset.
If you are not
registered for GST, you base your depreciation on the actual price you pay for
an asset, including GST.
DEPRECIATION
METHODS
There are two
ways you can account for depreciation on your assets;
as an individual asset or as part of a group or pool of assets.
Diminishing Value Basis
If you choose
to calculate depreciation on individual assets then you can choose either the
diminishing value (DV) method or the straight line method.
If you decide to group your assets then you must use the diminishing
value method.
The
DV method means that depreciation is calculated each year by using a constant
percentage of the asset’s adjusted tax value.
The DV method means that your depreciation deduction will progressively
reduce each year.
For example office equipment cost $10,000 and the diminishing value depreciation rate is 33%DV
| Adjusted Tax Value at beginning of Year | Depreciation | |
| Year 1 | 10000 | 3300 |
| Year 2 | 6700 | 2211 |
| Year 3 | 4489 | 1481 |
Straight Line Basis
Under
the straight line method an asset depreciates every year by the same amount,
which is a percentage of its original cost price.
For the same asset as in the above example, using the equivalent straight line depreciation rate of 24%, the depreciation is caqlculated as follows:
| Adjusted Tax Value at beginning of Year | Depreciation | |
| Year 1 | 10000 | 2400 |
| Year 2 | 7600 | 2400 |
| Year 3 | 5200 | 2400 |
Pool Method
The pool method allows a number of low-value assets to be grouped together (or pooled) and depreciated. Buildings cannot be pooled.