Accelerated Depreciation

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Updated: October 14, 2016
Finlease

Words Mark O’Donoghue, Founder and CEO, Finlease

Accelerated Depreciation is the hidden gold in the 2016 budget for companies with a turnover of up to $10 million (provided this Liberal initiative can get it through the Senate).

Although much publicity has surrounded the reclassification of small business, which now extends to companies with a turnover of up to $10 million and the ability of those businesses to claim 100 per cent depreciation on assets purchased of less than $20,000, these are “small bikkies” compared to what is available under the accelerated depreciation allowances that now become available to them under The Small Business Depreciation Pooling Provisions.

Owners of businesses in such capital intensive industries as transport, civil and related fields should take heed of this depreciation bonanza, which was scheduled to become available in July 2016, pending acceptance in the Senate.

Under the Small Business Depreciation Pooling Provisions, company owners can actively elect to place all of their assets in a pool for depreciation purposes and claim an overall depreciation rate of 30 per cent diminishing value (DV).

This was previously a benefit only afforded to companies with a turnover of less than $2 million but has now been opened up to much larger organisations.

The best way to explain this is via the following example:

Chatswood Cranes runs a fleet of 10 cranes, has a turnover of $5 million p/a, a profit of $1 million p/a and resultant tax bill of $300,000 p/a.

The written down value of their cranes is $4 million and they have been historically depreciating their cranes at 7.5 per cent DV ($300,000) p/a, which was expensed prior to the $1 million profit.

Effective July 1, 2016, Chatswood Cranes (who are now reclassified as a small business) placed all of their cranes into the new accelerated depreciation pool prior to year-end and are now claiming 30 per cent DV depreciation on the $4 million fleet.

The depreciation in the following year will climb from $300,000 (7.5 per cent DV) to $1.2 million (30 per cent DV) with the extra $900,000 reducing their taxable profit from $1 million to $100,000 resulting in the tax bill reducing from $300,000 to $30,000.

It is important to remember the diminishing value methodology of this accelerated depreciation, which on the above figures would show the following profile for future years (see table below).

Although the example has been used for a crane company, this could easily be applied to companies who require large amounts of expensive equipment such as earthmoving, transport or concrete pumping companies (just to name a few).

If you are a company involved in such capital intensive industries, who historically incur significant tax liabilities or expect to do so, it is advisable you speak with a specialist in this area or your accountants as a matter of absolute priority to investigate this significant opportunity.

As the late Kerry Packer most famously said at the 1991 Senate Enquiry: “If anyone in this country doesn’t (legitimately) minimise their tax, they want their heads read.”

Finlease

As of July 1 this year, the small business tax rate was lowered to 27.5 per cent and the turnover threshold for small businesses able to access it was increased from $2 million to $10 million. This means businesses with a turnover of less than $10 million will also be able to access other tax incentives, including the small business depreciation pooling provisions, simplified trading stock rules, and Pay-As-You-Go Instalments payments option.

For more information see the treasurer’s budget speech.