The details
- The four-star boutique motel was constructed in 1960’s and has since been renovated and refurbished.
- The 1,340 m² motel property is in New South Wales and managed on-site by the lessee.
- The property is leased and therefore only Division 40 P&E apply for tax depreciation
- The motel building is four-storeys and consists of 40 rooms, 36 parking facilities and onsite amenities including spas, kitchen, managers residence, an indoor/outdoor pool and bike hire facilities.
- The property generates a gross annual revenue of approximately $1,800,000 p.a, including rent of $300,000. Expenses are estimated at $720,000. Net Profit estimated at an average of $780,000 p.a.
- The total leasehold valuation of the property is $2.6 million (adjusted), based on a yield of 30%.
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.
The outcome
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 tax depreciation claims
First year: $134,516
Over five years: $212,982
Over 40 years: $237,774
This tax depreciation claim can be offset against profit before tax. The depreciation schedule is a 40-year schedule however we have only highlighted the first five years in the tables below.
Cash flow benefit
The cash flow benefit calculated over a five-year period comparing the three methods are:
- Small Business: $58,570
- Prime Cost: $41,834
- Diminishing Value: $37,333
| 5 Year Cashflow (Small Business Method) | ||||||||
| No Depreciation | Small Business Depreciation | |||||||
| Net Profit | Tax @ 27.5% | Net Cashflow | Net Profit | SB Deprn | Taxable Profit | Tax @ 27.5% | Net Cashflow | |
| Year 1 | 780,000 | (214,500) | 565,500 | 780,000 | (134,516) | 645,484 | (177,508) | 602,492 |
| Year 2 | 780,000 | (214,500) | 565,500 | 780,000 | (30,978) | 749,022 | (205,981) | 574,019 |
| Year 3 | 780,000 | (214,500) | 565,500 | 780,000 | (21,683) | 758,317 | (208,537) | 571,463 |
| Year 4 | 780,000 | (214,500) | 565,500 | 780,000 | (15,179) | 764,821 | (210,326) | 569,674 |
| Year 5 | 780,000 | (214,500) | 565,500 | 780,000 | (10,626) | 769,374 | (211,578) | 568,422 |
| Total | 3,900,000 | (1,072,500) | 2,827,500 | 3,900,000 | (212,982) | 3,687,018 | (1,013,930) | 2,886,070 |
| Benefit | Year 1 | 36,992 | ||||||
| 5 Years | 58,570 | |||||||
| 5 Year Cashflow (Prime Cost Method) | ||||||||
| No Depreciation | Prime Cost Depreciation | |||||||
| Net Profit | Tax @ 27.5% | Net Cashflow | Net Profit | PC Deprn | Taxable Profit | Tax @ 27.5% | Net Cashflow | |
| Year 1 | 780,000 | (214,500) | 565,500 | 780,000 | (16,245) | 763,755 | (210,033) | 569,967 |
| Year 2 | 780,000 | (214,500) | 565,500 | 780,000 | (37,156) | 742,844 | (204,282) | 575,718 |
| Year 3 | 780,000 | (214,500) | 565,500 | 780,000 | (35,689) | 744,311 | (204,686) | 575,314 |
| Year 4 | 780,000 | (214,500) | 565,500 | 780,000 | (31,988) | 748,012 | (205,703) | 574,297 |
| Year 5 | 780,000 | (214,500) | 565,500 | 780,000 | (31,045) | 748,955 | (205,963) | 574,037 |
| Total | 3,900,000 | (1,072,500) | 2,827,500 | 3,900,000 | (152,123) | 3,747,877 | (1,030,666) | 2,869,334 |
| Benefit | Year 1 | 4,467 | ||||||
| 5 Years | 41,834 | |||||||
| 5 Year Cashflow (Diminishing Value Method) | ||||||||
| No Depreciation | Diminishing Value Depreciation | |||||||
| Net Profit | Tax @ 27.5% | Net Cashflow | Net Profit | DV Deprn | Taxable Profit | Tax @ 27.5% | Net Cashflow | |
| Year 1 | 780,000 | (214,500) | 565,500 | 780,000 | (29,030) | 750,970 | (206,517) | 573,483 |
| Year 2 | 780,000 | (214,500) | 565,500 | 780,000 | (27,214) | 752,786 | (207,016) | 572,984 |
| Year 3 | 780,000 | (214,500) | 565,500 | 780,000 | (35,478) | 744,522 | (204,744) | 575,256 |
| Year 4 | 780,000 | (214,500) | 565,500 | 780,000 | (25,891) | 754,109 | (207,380) | 572,620 |
| Year 5 | 780,000 | (214,500) | 565,500 | 780,000 | (18,145) | 761,855 | (209,510) | 570,490 |
| Total | 3,900,000 | (1,072,500) | 2,827,500 | 3,900,000 | (135,758) | 3,764,242 | (1,035,167) | 2,864,833 |
| Benefits | Year 1 | 7,983 | ||||||
| Benefits | 5 Years | 37,333 | ||||||