Tax Depreciation – Unlocking Business Value

Clancy Miller - Valuer, Townsville

A ‘going concern’ sale relates to the sale of a business including everything that is necessary for its continued operation. This typically includes land, assets/plant and equipment as well as the fit-out of a property. Whilst the benefits of tax deprecations are gaining ground, many owners and tenants are still unaware of tax deprecations or don’t investigate further, undervaluing their potential return.

What can be claimed as a tax deduction?

The ATO allows for a tax deduction on the decreasing value of plant, equipment, and improvements to a property. When making a going concern purchase, the purchaser also purchases the right to significant tax depreciation entitlements on the new or second-hand assets and improvements.

When drawing up the contract of sale, it is important to understand what comes with the purchase of the business. A detailed inventory list will ensure clear evidence to substantiate a claim for tax depreciation.  If an inventory list is not available, our team can assist to provide the comprehensive inventory list to ensure the same opportunity to claim depreciation is achievable.

What is the tax depreciation process?

Once the assets/improvements are known, your Acumentis depreciation specialist will inspect the site, including all items that came with the business, to enable them to value these assets for depreciation purposes.

Recent government announcements provide for the instant asset write-off threshold to $20,000 from 1 July 2023 until 30 June 2023. Owners can still take advantage of the previous cap of $150,000 if the items were purchased in the Temporary Full Expensing period.

Considering the current instant asset write-off changes and temporary full expensing measures, this could result in significant tax deductions ranging from tens of thousands to hundreds of thousands of dollars, in just the first financial year of ownership alone. This goes a long way to partially offsetting your outlay in purchasing the business.

    Tax deductible items

    The following are examples of the tax-deductible items motel/hotel owners generally are able to claim:

    • Air conditioners
    • Carpets
    • Furniture
    • Laundry assets (in rooms)
    • Swimming pool assets
    • Beds and bedding
    • Ceiling fans
    • Safes
    • Tennis court nets
    • Blinds
    • Heaters
    • Beer dispensing equipment
    • Televisions & refrigerators
    • Crockery & cutlery
    • Hot water systems
    • Fire extinguishers
    • Spa bath pumps
    • Trolleys

    Case Study - Motel

    Taking a motel business as an example, the same could be said for caravan parks and other short-term accommodation businesses. In this example, the business was purchased for $250,000 and they were able to claim $94,563 in tax deductions in the first year of ownership by depreciating the assets which were purchased with the business.

    To demonstrate the benefit from a business-only perspective (excluding building depreciation and ongoing depreciation claims each year), we provide a case study example below. The key advantage that this case study demonstrates is that the taxation benefits for the low-cost items are generally able to be claimed within the first year so the benefit is a one-off immediate benefit.

    For a ‘walk in walk out’ purchase of the property and business additional building deprecation may be claimable.

    The tax depreciation claimable are Low Cost/Low Value Pool and hence in accordance with Small Business and Instant Asset Write Off Provisions these items can be written off in a single year.

    Total Annual Income $1,800,000
    Total Annual Expenses $1,020,000
    Cash income minus expenses $780,000
    Tax Depreciation Claimed -$134,516
    Pre tax profit $645,484
    Net Annual Cash Position
    (cash less tax payable)
    Total Annual Income $1,800,000
    Total Annual Expenses $1,020,000
    Cash income minus expenses $780,000
    Tax Depreciation Claimed $0
    Pre tax profit $780,000
    Net Annual Cash Position
    (cash less tax payable)

      At a tax rate of 25% to 47% (this will change based on personal circumstances) the case study above demonstrates a taxation benefit in the first year of $33,629 to $63,223.

      In summary, going concern purchases present a real and almost immediate tangible opportunity for significant tax savings. After a large outlay in purchasing the business, this can also increase cash flow in the early days of running it. Tax depreciation is something that cannot be overlooked when considering the purchase of a business, as doing so may cost you a substantial amount of money.

      The team of trained and registered property professionals at Acumentis knows what to look for when preparing tax depreciation schedules making the process simple and smooth for our valued clients. Reach out to discuss how we can assist you to maximise tax benefits for your business or learn more about how we’ve assisted others.

      Annette Smith
      State Director Regional Operations (North)
        |  LinkedIn
      Want to hear more
      from Acumentis?

      Sign up to our mailing list

      • This field is for validation purposes and should be left unchanged.