Ac­cel­er­ated De­pre­ci­a­tion, an out­stand­ing gift for com­pa­nies with a turnover of up to $10mil­lion.

Australasian Timber - - FINANCE - By Mark O’Donoghue CEO & Founder of Fin­lease By Mark O'Donoghue CEO & Founder of Fin­lease

AL­THOUGH MUCH pub­lic­ity af­ter the 2016 and 2017 bud­gets sur­rounded the abil­ity for larger busi­nesses to claim 100% de­pre­ci­a­tion on as­sets pur­chased of less than $20,000 through the re­clas­si­fi­ca­tion of small busi­ness to in­cor­po­rate com­pa­nies with a turnover of up to $10mil­lion, this is “small change” com­pared to what has now be­come avail­able to those com­pa­nies un­der the Sim­pli­fied De­pre­ci­a­tion Rules.

https://www.ato.gov.au/busi­ness/de­pre­ci­a­tion-and-cap­i­tal-ex­pens­esand-al­lowances/sim­pler-de­pre­ci­a­tion­for-small-busi­ness

Un­der the Sim­pli­fied De­pre­ci­a­tion Rules, com­pany own­ers can ac­tively elect to place all of their as­sets in a pool for de­pre­ci­a­tion pur­poses and claim de­pre­ci­a­tion rates of 15% in the 1st year and 30% in each sub­se­quent year (on a Di­min­ish­ing Value ba­sis).

This was pre­vi­ously a ben­e­fit only af­forded to com­pa­nies with a turnover of less than $2 mil­lion but has now been opened up to much larger or­gan­i­sa­tions.

Own­ers of busi­nesses in such cap­i­tal in­ten­sive in­dus­tries as man­u­fac­tur­ing, trans­port, civil and other re­lated fields should take heed of this de­pre­ci­a­tion bo­nanza which has just be­come avail­able to them com­menc­ing this cur­rent financial year (2017).

The best way to ex­plain this is via the fol­low­ing example:

Ar­tar­mon Cranes runs a fleet of 20 cranes, has a turnover of $8 mil­lion p/a, a profit of $1 mil­lion p/a and re­sul­tant tax bill of $300,000 p/a.

The cur­rent writ­ten down value of their crane fleet is $4 mil­lion and they have been his­tor­i­cally de­pre­ci­at­ing their cranes at 7.5% DV ($300,000) p/a which was ex­pensed prior to the $1mil­lion profit.

In 2017, Ar­tar­mon Cranes (who are now re­clas­si­fied as a Small Busi­ness) placed all of their cranes into the new Sim­pli­fied De­pre­ci­a­tion Sys­tem prior to June 30 2017 and are now claim­ing 15% DV de­pre­ci­a­tion in for the 2017 financial year and 30% for 2018 and be­yond on their $4mil­lion fleet.

The de­pre­ci­a­tion in 2017 will climb from $300,000 (7.5% DV) to $600,000 (15% DV) with the ex­tra $300,000 re­duc­ing their tax­able profit from $1 mil­lion to $700,000 re­sult­ing in the tax bill re­duc­ing from $300,000 to $210,000.

The de­pre­ci­a­tion in 2018 will climb from $300,000 (7.5% DV) to $1,020,000 (30% DV) with the ex­tra $720,000 re­duc­ing their tax­able profit from $1 mil­lion to $280,000 re­sult­ing in the tax bill re­duc­ing from $300,000 to $84,000.

It is im­por­tant to re­mem­ber the di­min­ish­ing value method­ol­ogy of this ac­cel­er­ated de­pre­ci­a­tion, which on the above fig­ures would show the fol­low­ing pro­file for fu­ture years:

Al­though the example has been used for a crane com­pany, this could eas­ily be ap­plied to com­pa­nies who re­quire large amounts of ex­pen­sive equip­ment such as man­u­fac­tur­ing, earth­mov­ing, trans­port or con­crete pump­ing com­pa­nies (just to name a few).

If you are a com­pany in­volved in such cap­i­tal in­ten­sive in­dus­tries, who his­tor­i­cally in­cur sig­nif­i­cant tax li­a­bil­i­ties or ex­pect to do so, it is ad­vis­able speak with a spe­cial­ist in this area or your ac­coun­tants as a mat­ter of ab­so­lute pri­or­ity to in­ves­ti­gate this sig­nif­i­cant op­por­tu­nity.*

As the late Kerry Packer most fa­mously said the 1991 Se­nate En­quiry “if any­one in this coun­try doesn’t (le­git­i­mately) min­imise their tax, they want their heads read”.

* Fin­lease does not pro­vide for­mal tax ad­vice and would ad­vise busi­ness own­ers to speak with their ac­coun­tants on these mat­ters.

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