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Business income tax: Depreciation
There are two methods of calculating depreciation. In most circumstances you can choose between:
You do not have to use the same depreciation method for all your assets, but you must use whatever method you choose for an asset for the full year. You can change methods for any asset from year to year.
You can elect not to depreciate an asset.
How the depreciation rates apply
We set the depreciation rates for various assets based on the cost and useful life of the asset being depreciated. The general depreciation rates both diminishing value and straight line apply as follows:
1993 - 2005 asset rates
Use for assets acquired on or after 1 April 1993 and before 1 April 2005, and buildings acquired on or after 1 April 1993 and before 19 May 2005
Asset rates from 2006
Use for assets other than buildings acquired on or after 1 April 2005 and buildings acquired on or after 19 May 2005.
The amount of depreciation is worked out on the adjusted tax value of the asset. This value is the original cost less any depreciation already claimed in previous years. If you are registered for GST the original cost price should not include GST you have already claimed in your GST return.
A car purchased in May 2014 has a depreciation rate of 30% diminishing value. The cost (excluding GST) was $30,000.
Depreciation is calculated on the original cost price of the asset, and the same amount is claimed each year. If you are registered for GST, the cost excludes any GST you have already claimed in your GST return.
If the car in the example above is depreciated using the straight line method, the rate is 21%. The GST-exclusive cost is $30,000, so the depreciation to claim each year is $6,300.
$30,000 x 21% = $6,300
You may use a pool system to depreciate low-value assets collectively rather than individually and depreciate them as though they were a single asset.
You must use diminishing value depreciation rates for pooled assets.
You can pool assets that:
- individually cost $5,000 or less, or have been depreciated so the adjusted tax value is $5,000 or less, and
- are used 100% for business, or are liable for fringe benefit tax if the business use is less than 100%.
Each pool is depreciated using the diminishing value method, at the lowest rate applying to any asset in the pool.
The maximum pooling value of $5,000 applies from the 2015-2016 income year onwards. If you are filing for the 2014-2015 or previous income years the maximum pooling value is $2,000.
Assets costing $500 or less (including loose tools)
Low-value assets, that is, assets that cost $500 or less, are deductible in the year they are acquired or created provided:
- they are not purchased from the same supplier at the same time as other assets to which the same depreciation rate applies (unless the entire purchase costs $500 or less)
- the assets will not become part of an asset that is depreciable, for example, the cost of materials to build a wall in a factory
- they were purchased on or after 19 May 2005 (the threshold before 19 May 2005 was $200.00)
If you do not want to claim depreciation on an asset, and you want to avoid paying tax on depreciation recovered when that depreciation was not claimed, you must elect to treat the asset as not depreciable.
Let us know if you are making an election by notifying us in your tax return for the income year when:
- you purchase your asset
- you change the use of your asset from non-business to business
- you elect not to depreciate an asset that you have never claimed depreciation on. The election of this asset will apply for each year after the asset was purchased.
The focus is on an asset-by-asset election on whether to depreciate each item or not. Once you have notified us of your election not to depreciate an asset you cannot claim depreciation on it in future years. An example of where you may not want to claim depreciation is where you work from home and you have a small area set aside for business purposes, such as an office.
If depreciation has been claimed on the business area of your home
If you claim depreciation on the business area set aside in your home, you must include the depreciation recovered in your tax return when you cease using your home for business purposes, or when you sell your home.
This example is based on a business (office) floor area of 10% of the total floor area of the house.
When a building is sold for more than its adjusted tax value, the depreciation recovered is taxable income. The amount of depreciation recovered is the lesser of:
- the original cost price of the building, minus the adjusted tax value, or
- the sale price, minus the adjusted tax value.
The cost of software is a capital expense and must be depreciated. The cost includes paying for rights to use, purchasing upgrades and developing in-house packages.