The video title Business Basics Depreciation slides in from the left.
The title slides to the right of the screen and is replaced by a person sitting at a desk with a laptop. File folders, a desk lamp and a mug also appear on the table. A clock ticks on the wall. 3 lights hang from the roof and there is a potted plant on both sides of the desk.
Two circles appear above the person’s head, 1 has a dollar symbol in the middle of it, the other a calculator.
Easy listening style music plays throughout the entire video.
Depreciation is one of those things you’ll become familiar with once you’re in business.
In this video, we explain what it is and how you calculate it.
A computer screen is sitting on a desk, a forklift with 2 boxes on the forks and van also appear suggesting assets a business may own. A circle with a dollar symbol inside it appears above each asset.
A downward arrow appears next to each dollar symbol showing depreciation is a loss on the assets value.
A big circle appears with an income tax return in the middle. Two circles with dollar symbols appear on the tax return, 1 is smooth and represents gross income, the other is spikey and represents expenses. The expenses are removed from the gross income.
Assets, otherwise known as substantial things businesses own, mostly lose value over time as they get older.
This loss of value is called depreciation.
Businesses claim depreciation loss as a deduction expense each tax year.
You treat depreciation like an expense and deduct it from your gross income when you do your income tax return.
Andie is waving to the camera. A sign “Andie’s plastic moulding” appears at the top left of the screen.
A plastic moulding machine slides in from the right. A horizontal timeline appears above the machine with “12 months” displayed above that showing it will last longer than 12 months. $5,000+ appears on the machine showing it cost more than this so is not a low-value asset.
The timeline is replaced by a circle with a dollar symbol and downward arrow in it. A calendar appears showing the month of March and 31 is highlighted.
Andie’s got a plastic moulding business with assets.
Let’s talk about depreciation with Andie’s new machine, new computer, and old truck.
Andie has just bought a new moulding machine for her factory.
As it is likely to last longer than 12 months and cost over 5,000 dollars, she knows she can depreciate the machine at the end of the tax year, that’s the thirty-first of March.
Two circles appear, 1 has “Diminishing value” inside it, the other has “Straight line method”. Graphs appear next to each circle.
The diminishing value graph curves downward from left to right. Dollar symbols appear on the graph, starting big at the left and decreasing in size to the right. This shows depreciation starts out big but reduces each year.
The straight line method graph is a straight line from left to right. Dollar symbols appear on the graph, and remain the same size from left to right. This shows depreciation is the same each year it is claimed.
A laptop appears showing the Diminishing value depreciation rate is 13%, and the Straight line method depreciation rate is 8.5%.
Depreciation rates are based on the expected life of the asset.
In most cases, you can choose either a diminishing value or straight line method to calculate depreciation.
If Andie chooses diminishing value, she can claim a bigger deduction in the first year, but the deductions will get smaller in later years, and it will take longer to fully depreciate the machine.
If she chooses straight line, she’ll claim the same amount each year and the machine will be depreciated much quicker.
Andie uses our online depreciation rate resource and finds plastic moulding machines have a diminishing value rate of 13% and a straight line rate of 8.5%.
It’s up to Andie which option she prefers.
Back at Andie’s business a computer is shown on a deck with “$800” above it. The income tax return circle appears indicating Andie is claiming the full value of the computer as an expense in the year she bought it as it’s a low-value asset.
A van slides in from the left with a dollar symbol and downward arrow above it showing depreciation can be claimed on private assets introduced to the business. A circle appears with an independent valuation report inside it.
A computer screen appears. A circle with a dollar symbol in it appears next to the screen. The screen turns into a circle with a dollar symbol in it. Then the 2 circles merge comparing the sale price to the adjusted book value. An upward arrow shows a gain is taxable, a downward arrow shows a loss is a deductible expense.
Andie also bought a computer, it was only 800 dollars.
Since it’s classed as a low-value asset, Andie can deduct the full cost of it in the year she purchases it, instead of having to spread the cost over the life of the computer.
If you already own an asset and introduce it into your business, you can claim depreciation on the market value of the asset.
The best way to determine market value of assets you want to depreciate is to get an independent valuation.
Make sure you keep a record of any valuation you obtain.
If you then sell the asset, you compare the sales price to the asset's adjusted book value in your fixed asset register.
Any gain is taxable, and any loss is deductible.
A valuation of “$500” appears in a circle for Andie’s truck. A newspaper clipping with $600 appears in a circle next to the valuation showing Andie is selling her truck.
The circles merge and an income tax return appear in the new circle. “+$100” appears over the gross income showing Andie includes the profit as taxable income. “-$200” then appears over the expenses to show this as a deduction claimed if the truck sold for only $300.
Back to Andie.
Andie received a valuation of 500 dollars for her truck from a local dealership.
Andie then decides to sell her truck.
She puts an ad in the paper and sells it for 600 dollars.
The truck had an adjusted tax value of 500 dollars, so Andie includes the 100 dollar gain as income in her tax return.
If the truck had sold for 300 dollars, that would have been a loss of 200 dollars that Andie could have claimed in her tax return.
Two laptops appear. One has business.govt.nz on it, the other ird.govt.nz
The video ends with the Inland Revenue Te Tari Taake logo.
Wrapping up, for useful tools and resources for business, visit business.govt.nz
For more information to help you calculate your depreciation, visit our website ird.govt.nz