The approach
In this tax depreciation example, the quantity surveyor applied three methods in the calculation of total depreciation – Small Business (SB), Prime Cost (PC) and Diminishing Value (DV) methods respectively.
Differing criteria, considerations and requirements apply to each method. Based on the data a decision on the best method to be consistently applied for tax depreciation is determined by the accountant in conjunction with the client, based on their circumstances.
Claimable tax depreciation
In this example the Small Business method delivers the highest upfront tax depreciation and cash flow benefits.
Total Small Business – Division 40 & Division 43 tax depreciation claims
First year: $684,931
Over 40 years: $6,441,052
The tax depreciation for total operation, consisting of Division 40 (P&L) and Division 43 (B&M), total over a period of 40 years.
Cash flow benefit
The cash flow benefit calculated over a five-year period comparing the three methods are:
| 5 Year Cashflow (Small Business Method) | ||||||||
| No Depreciation | Small Business Depreciation | |||||||
| Net Profit | Tax @ 27.5% | Net Cashflow | Net Profit | Small Business Depreciation | Taxable Profit | Tax @ 27.5% | Net Cashflow | |
| Year 1 | 123,985 | (34,096) | 89,889 | 123,985 | (684,931) | (560,946) | 154,260 | 278,245 |
| Year 2 | 123,985 | (34,096) | 89,889 | 123,985 | – | 123,985 | (34,096) | 89,889 |
| Year 3 | 123,985 | (34,096) | 89,889 | 123,985 | – | 123,985 | (34,096) | 89,889 |
| Year 4 | 123,985 | (34,096) | 89,889 | 123,985 | – | 123,985 | (34,096) | 89,889 |
| Year 5 | 123,985 | (34,096) | 89,889 | 123,985 | – | 123,985 | (34,096) | 89,889 |
| Total | 619,925 | (170,479) | 449,446 | 619,925 | (684,931) | (65,006) | 17,877 | 637,802 |
| Benefit | Year 1 | 188,356 | ||||||
| 5 Years | 188,356 | |||||||
| 5 Year Cashflow (Prime Cost Method) | ||||||||
| No Depreciation | Prime Cost Depreciation | |||||||
| Net Profit | Tax @ 27.5% | Net Cashflow | Net Profit | Prime Cost Depreciation | Taxable Profit | Tax @ 27.5% | Net Cashflow | |
| Year 1 | 123,985 | (34,096) | 89,889 | 123,985 | (29,301) | 94,684 | (26,038) | 97,947 |
| Year 2 | 123,985 | (34,096) | 89,889 | 123,985 | (29,301) | 94,684 | (26,038) | 97,947 |
| Year 3 | 123,985 | (34,096) | 89,889 | 123,985 | (29,301) | 94,684 | (26,038) | 97,947 |
| Year 4 | 123,985 | (34,096) | 89,889 | 123,985 | (29,301) | 94,684 | (26,038) | 97,947 |
| Year 5 | 123,985 | (34,096) | 89,889 | 123,985 | (29,301) | 94,684 | (26,038) | 97,947 |
| Total | 619,925 | (170,479) | 449,446 | 619,925 | (146,505) | 473,420 | (130,191) | 489,735 |
| Benefit | Year 1 | 8,058 | ||||||
| 5 Years | 40,289 | |||||||
| 5 Year Cashflow (Diminishing Value Method) | ||||||||
| No Depreciation | Diminishing Value Depreciation | |||||||
| Net Profit | Tax @ 27.5% | Net Cashflow | Net Profit | Diminishing Value Depreciation | Taxable Profit | Tax @ 27.5% | Net Cashflow | |
| Year 1 | 123,985 | (34,096) | 89,889 | 123,985 | (37,762) | 86,223 | (23,711) | 100,274 |
| Year 2 | 123,985 | (34,096) | 89,889 | 123,985 | – | 123,985 | (34,096) | 89,889 |
| Year 3 | 123,985 | (34,096) | 89,889 | 123,985 | – | 123,985 | (34,096) | 89,889 |
| Year 4 | 123,985 | (34,096) | 89,889 | 123,985 | – | 123,985 | (34,096) | 89,889 |
| Year 5 | 123,985 | (34,096) | 89,889 | 123,985 | – | 123,985 | (34,096) | 89,889 |
| Total | 619,925 | (170,479) | 449,446 | 619,925 | (37,762) | 582,163 | (160,095) | 459,830 |
| Benefit | Year 1 | 10,385 | ||||||
| 5 Years | 10,385 | |||||||
It is clearly very important to determine the correct method to be used upfront as it may have a major cash flow impact on the business from year one where tax depreciation claims apply. This positive cash flow impact would not have been possible if the owner did not undertake this tax deprecation assessment.
Have one point of contact for all your client’s property needs.
Our registered team of professionally certified valuers are experts across commercial, residential and rural and agribusiness property types. We know what depreciable items to look for ensuring that you get a comprehensive ATO approved depreciation schedule prepared by our certified Quantity Surveyors.
We’ll provide you with one tax depreciation schedule that lasts up to 40 years of claim and the fee is 100% tax deductible. We can also undertake a retrospective tax depreciation schedule if you haven’t been claiming deductions so that you don’t miss the tax benefits.
Wherever you are in Australia a qualified Acumentis property professional is nearby. With over 300 property professionals working from 45 offices in metropolitan, regional and rural Australia our team have your property and tax depreciation needs covered.
Keep up to date with market insights
Sign up to our mailing list