METHODS OF DEPRECIATION
There are two methods to work out the decline in value of a depreciating asset: Diminishing Value and the Prime Cost methods. Once you have chosen a method for depreciation you cannot change to the other method. The first year claim is based on the number of days remaining in the income year that the tax payer purchased the asset.
Diminishing Value (DV) Method
The diminishing value method assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.
Prime Cost (PC) Method
The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life.
AREAS OF DEPRECIATION
There are two areas of depreciation available to property capital allowance/tax depreciation reports. They are the Plant and Equipment items which fall under the classification of Division 40 and the building envelope that is the Division 43 componet.
Division 40 - Depreciating Assets
Division 40 of the Income Tax Assessment Act 1997 - Deductions for Capital Works, this part of the Act covers the principles of decline in value of a depreciating asset. Depreciating assets are assets with a limited effective life that are reasonably expected to decline in value.
The decline in value is based on the cost and effective life of the depreciating asset, not its actual change in value. It starts when you begin to use the asset (or when you have it installed ready for use) and it continues while you use the asset.
The effective lives of applicable depreciating assets are based on guidelines set down by the ATO Commissioner. Taxation Ruling IT 2685 lists the effective life of various items of plant and was issued on 11 June 1992. This remained in force until it was replaced by Taxation Ruling TR 2000/18 on 1 January 2001 and has been periodically updated since.
Division 43 – Capital Allowances
Division 43 of the Income Tax Assessment Act 1997 - Deductions for Capital Works, is the part of the act that defines the Building Allowance and Structural Improvement deductions available for buildings.
Rates for building allowance and structural improvements are either 2.5% or 4% dependent on the use of the building and construction commencement date.
