If you’re anything like most Australians, come tax time you may find yourself grappling with the abstract concept of ‘depreciation’, listening to your accountant or even just your ATO-savvy coworker explain time and time again just what it means, and how valuable knowing about your asset’s rate of depreciation can be for you.  Of course, even with all the discourse surrounding depreciation as a concept, it can be tricky knowing exactly what it is, especially given that the figures can differ from asset to asset and from region to region, so a Brisbane tax depreciation report is likely going to look distinct from a Melbourne report for a similar asset.   For this reason, we’ve taken it upon ourselves to put together a little FAQ surrounding the concept of depreciation. Read on to ensure that you’re ready to hand in your next tax return with absolute confidence.  

What is depreciation?

Simply put, depreciation is the term for an asset losing value over time, until the value of that asset reaches zero. There are generally considered to be four different types of depreciation rates:  

• Straight-line depreciation – where the rate of depreciation is consistent over a fixed amount of years

 

• Declining balance depreciation – where the rate of depreciation accelerates with every passing year rather than staying consistent

 

• Units of production depreciation – where the rate of depreciation is calculated by the amount of work performed by that asset rather than time elapsed since acquiring the asset

 

• Sum-of-the-years’ digits depreciation – where the annual depreciation is separated into fractions with respect to the asset’s useful or effective life.

What can depreciate?

Depreciation can actually be claimed upon a number of both fixed as well as intangible assets. Fixed assets are defined as any physical assets that can experience tangible decreases in value, such as buildings, technology, machinery, tools, and other goods that are relevant to your industry, like office supplies and general business equipment.   Intangible assets are assets that aren’t physical goods, but can still generate business or income. Things like goodwill, brands or trademarks, software, patents, and other forms of intellectual property fall under the umbrella of intangible assets. 

How can I calculate the depreciation of my asset?

Each type of depreciation rate comes with its own specific formula that you can use to calculate the depreciation of your asset. All you need to know is what depreciation rate is likely going to be most applicable to that asset, as well as the key figures surrounding that asset. These key figures can include information like the asset’s cost, it’s useful life, and it’s residual or salvage value, also known as that asset’s estimated worth upon becoming totally depreciated.    If you’re having trouble with calculating the depreciation of your assets, you can consult with your accountant, as well as use the ATO’s depreciation and capital allowances tool.

How can I stay on top of my asset’s depreciation?

It’s best to be proactive about the depreciation of your asset so that filing your tax return can be an effortless endeavour every year. Work with your accountant or financial planner to create a detailed depreciation schedule for any assets that you’re looking to make claims on, and ensure that you know exactly what amount to claim with every passing year. For straight-line assets, it’s naturally a lot easier to keep track, as the numbers stay static. For declining balance assets, however, it can be all too easy to confuse figures and end up making some mistakes that may be tricky to rectify. If you’re uncertain of any of the figures on your spreadsheets, it’s always worth consulting an expert.   ~   Your first forays into the world of depreciation are likely going to be as confusing as hearing about the concept for the first time, but rest assured that after some exposure, the patterns in the numbers do start to emerge, and the practice will become increasingly simple.