Monday, 26 May 2014

Australian Depreciation Rules - Tax

According to the ATO - Some assets are excluded from the simplified depreciation rules. You can head to their website and find the guide. How to obtain this publication at Guide to depreciating assets 2013 (NAT 1996, PDF, 928KB).

Asset Depreciation

  •  Is an accrual accounting convention distributing and matching lumpy capital investments in long-lived assets with relevant annual revenue generated by consuming the assets over their useful lives
  • It is not a yearly cash outflow
  • As a consequence depreciation must be added back to the net profit after tax to get the corresponding net cash flow for the period
  • Only affects cash flows because its deducibility for tax purposes reduces the amount of the tax paid

Two Depreciation methods commonly used in Australia:

  • Prime Cost (PC) =Straightline (SL) i.e. 20% each year. = Historical asset cost / Effective life

  • Diminishing value (DV) = declining balance (DB) = (Opening written down historical assetvalue + Assets acquired during the period) * 200% / Effective life
Using Excel:

Excel offers five different depreciation functions. We consider an asset with an initial cost of $10,000, a salvage value (residual value) of $1000 and a useful life of 10 periods (years). Below you can find the results of all five functions.

The SLN function performs the following calculation. Deprecation Value = (10,000 - 1,000) / 10 = 900.00. If we subtract this value 10 times, the asset depreciates from 10,000 to 1000 in 10 years (see first picture, bottom half).

The DB (Declining Balance) function is a bit more complicated. It uses a fixed rate to calculate the depreciation values.

The DB function performs the following calculations. Fixed rate = 1 - ((salvage / cost) ^ (1 / life)) = 1 - (1000/10,000)^(1/10) = 1 - 0.7943282347 = 0.206 (rounded to 3 decimal places). Depreciation value period 1 = 10,000 * 0.206 = 2,060.00. Deprecation value period 2 = (10,000 - 2,060.00) * 0.206 = 1635.64, etc. If we subtract these values, the asset depreciates from 10,000 to 995.88 in 10 years (see first picture, bottom half).

Note: the DB function has a fifth optional argument. You can use this argument to indicate the number of months to go in the first year (If omitted, it is assumed to be 12). For example, set this argument to 9 if you purchase your asset at the beginning of the second quarter in year 1 (9 months to go in the first year). Excel uses a slightly different formula to calculate the deprecation value for the first and last period (the last period represents an 11th year with only 3 months).

Depreciation Spreadsheet in Excel

Excellent guide here also 

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