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The benefits of accelerated depreciation

Finlease explains to Cranes and Lifting how accelerated depreciation can benefit crane businesses with a turnover of up to $10 million.

Finlease explains to Cranes and Lifting how accelerated depreciation can benefit crane businesses with a turnover of up to $10 million.

After the 2016 and 2017 budgets, much of the publicity surrounded the ability for larger businesses to claim 100 per cent depreciation on assets purchased for less than $20,000 (now $30,000) through the reclassification of small business to incorporate companies with a turnover of up to $10million. According to Jeff Wilson a partner at Finlease, this is “small change” compared to what became available to those companies under the Simplified Depreciation Rules.

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 per cent in the first year and 30 per cent in each subsequent year (on a Diminishing Value [DV] 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. Even two to three years on, we are still seeing companies completely unaware of this very significant benefit,” said Wilson.

“Owners of businesses in such capital-intensive industries such as manufacturing, transport, civil construction and other related fields should take heed of this depreciation bonanza,” he said.

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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 per annum, a profit of $1 million per annum and resultant tax bill of $300,000 per annum.

The current written down value of their crane fleet is $4 million, and they have been historically depreciating their cranes at 10 per cent DV ($400,000) per annum, 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 30th, 2017 claiming 15 per cent DV depreciation in for the 2017 financial year and 30 per cent for 2018 and beyond on their $4 million fleet.

The depreciation in 2017 climbed from $400,000 (10 per cent DV) to $600,000 (15 per cent DV) with the extra $200,000 in depreciation claimed reducing their taxable profit from $1 million to $800,000 resulting in the tax bill being reduced from $300,000 to $240,000.

The depreciation in 2018 climbed from $360,000 (10 per cent DV) to $1,020,000 (30 per cent DV) with the extra $660,000 in depreciation reducing their taxable profit from $1 million to $340,000 resulting in the tax bill reducing from $300,000 to $102,000.

It is important to remember the diminishing value methodology of this accelerated depreciation, which on the above figures shows the following profile in the table 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 equipment, transport or concrete pumping companies, just to name a few.

There are two additional aspects which provide further benefits.

Depreciation offset rules

Under the pooling provisions within the simplified depreciation system, all assets sit in this pool.

If an asset which has been depreciated to say $100,000 (as a part of an overall $800,000 pool) and it is sold for $300,000, there is no immediate “profit on sale” extraordinary income issue and resultant tax bill. The overall pool is simply reduced to $500,000 ($800,000 – $300,000). In other words, there is not a tax liability created on the “profit from the sale of asset” because it simply reduces the balance of the pool for future depreciation. In this context, the profit on the sale is simply the value of the asset sold, relative to its written down value (WDV).

Similarly, when a new asset is purchased for say $600,000 after the sale of the old asset, the pool value would increase from $500,000 to $1.1million.

“Now remember, the depreciation rate on this overall pool is 30 per sent DV, 15 per cent for the first year on any new asset coming into the pool and then 30 per cent for each year after that,” said Wilson.

“The level of depreciation claim will alter each year as a function of this, however at substantially higher levels than previously claimed prior to entering into this accelerated depreciation pool,” he said.

Deductible prepayment of expenses

The other benefit available to larger companies with a turnover up to $10 million per annum is now the ability to claim deductions for the prepayment of up to 12 months on allowable expenses. For profitable companies with good cash flow, this is an ideal way to pre-pay some of next year’s expenses and receive a tax deduction for them this year.

In a tax regime where you not only have to pay this year’s tax but also pre-pay next year’s expected tax via the pay-as-you-go (PAYG)  percentage estimate of turnover on your quarterly business-activity-statement (BAS), any reduction in these expenses are beneficial.

At the risk of being a government groupie, this change in the recalibration of small business from $2 million to $10 million in annual turnover has given an enormous number of businesses some real benefits in increased legitimate tax deductions which will go a long way to preserving cash.

“As the largest employer of people in Australia, small business has, through the above initiatives, been given a more supportive environment from which to grow and prosper.

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

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 to speak with a specialist in this area or your accountants as a matter of absolute priority to investigate this significant opportunity.

A useful link to understand accelerated depreciation can be found at:  https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/simpler-depreciation-for-small-business/

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