The depreciation schedule 043-03070030

Depreciation is an accounting method used to write off the value of an asset which reduces over time due to age, wear and tear. The Australian Taxation Office (ATO) allows the amount of the reduction in value as a deduction under Division 40 and Sub-division 328-D of the Income Tax Assessment Act (ITAA) 1997.

Depreciation on plant and equipment claimed under Division 40 of the ITAA 1997 is an allowable expense for sole traders, partnerships, Private Companies and Private Trusts for social security purposes as per sections 1075 and 1208B of the Social Security Act 1991.

The ITAA 1997 includes the following in regard to Division 40:

"You can deduct an amount equal to the decline in value of a depreciating asset (an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used) that you hold.

That decline is generally measured by reference to the effective life of the asset."

Under Division 40 of the ITAA 1997, an Instant Asset Write-off of $30,000 is available for medium sized businesses (with aggregated turnover exceeding $10,000,000) from 2 April 2019 to 11 March 2020. This increased to $150,000 for medium sized businesses from 12 March 2020 to 30 June 2020. These Division 40 Instant asset Write-off deductions are allowable for social security purposes as long as the depreciation on the underlying asset would have been allowable.

Where a customer provides an income tax return and financial statements that include this write-off, they will need to consider whether or not the net income or loss represents the current circumstances of their business. If not, they will need to provide a profit and loss statement that represents their current business income.

However depreciation or instant asset write-offs claimed under subdivision 328-D of the ITAA 1997 are not allowed for social security purposes. Small businesses (including sole traders, partnerships, companies and trusts) are able to access taxation concession including immediately writing off assets (under a set threshold) and using simplified depreciation rules. The ITAA 1997 includes the following in regard to Subdivision 328-D.

"If you are a small business entity, you can choose to deduct amounts for most of your depreciating assets on a diminishing value basis using a pool that is treated as a single depreciating asset.

Broadly, the pool is made up of the costs of the depreciating assets that are allocated to it or, in some cases, a proportion of those costs. The pool rate is currently 30%."

Depreciation claimed under Division 40 can be calculated using either the prime cost method or the diminishing value method and is also calculated over the life of the asset whereas Subdivision 328-D allows the immediate write-off of some assets and the depreciation of a pool of depreciating assets using the diminishing value method at a rate of 30% (rather than depreciating individual assets over their effective life).

Depreciation is applied to tangible assets and is commonly used to reduce the value of assets like machines, equipment and motor vehicles. Amortisation is another term used to describe the reduction in the value of an asset, but is usually applied to intangible assets like goodwill and lease values. Amortisation is not an allowable deduction for Social Security Income Test assessment purposes.

Depreciation on plant and equipment is an allowable deduction. Depreciation in respect of buildings is also allowed as a deduction against business income, but only in limited circumstances. Depreciation is calculated by reducing the cost of an asset by a certain percentage. The different percentage rates of depreciation applicable to particular assets are set by the ATO.

Depreciation of assets claimed under Division 40 of the Income Tax Assessment Act 1997 is tabled in a document called a depreciation schedule. The depreciation schedule would normally show the following:

• the original cost of the item
• the written down value of the item at the start of the financial year
• the percentage rate of depreciation of the item
• the amount of depreciation for this financial year (under the heading 'Prime Cost Method')
• the written down value of the item at the end of the financial year
• details of assets purchased in the last 12 months
• details of assets disposed of in the last 12 months

Depreciation or write-off of assets claimed under Subdivision 328-D of the Income Tax Assessment Act 1997 is detailed in a document called a SBE general pool worksheet. This worksheet would normally show the following:

• Opening pool balance
• Depreciation at 30%
• New assets from Worksheet
• Depreciation at 15% - this is the percentage that can be claimed on assets in the year the business starts to use them or has them installed ready for use. 30% is then claimed each year after the first year.
• Value of assets disposed
• Total decline in value
• Closing pool balance

See the Resources page for an Example SBE general pool worksheet.

The depreciation schedule includes all business assets which are subject to depreciation. In the absence of a business balance sheet, a depreciation schedule may provide an indication of the value of business assets.

It will show the proportion of time an asset is used for private purposes. Depreciation of business assets which are used for the private benefit of the owners of the business is not an allowable deduction against business income under the Social Security Act 1991. See Step 9 in Allowable or non-allowable deductions - A to H table when requesting a depreciation schedule.