What the new depreciation rates introduced in the 2006-07 Budget mean for y

In the 2006-07 Federal Budget changes to the depreciation arrangements for business were introduced but what differences will this make for your clients and for you as accounting professionals?

First, let’s look at the increases to the diminishing value rate from 150 per cent to 200 per cent. According to the Budget papers, the new rate applies to all eligible assets acquired on or after 10 May 2006, regardless of the asset’s effective life and will provide a benefit of $3.7 billion over the next four years for Australian businesses. According to the Government, this offers an incentive to invest in new plant and equipment necessary to keep pace with new technology and remain competitive and also aligns depreciation deductions for tax purposes more closely with the actual decline in economic value of assets.

The definition of depreciable assets remains the same and the new rates can simply replace the old rates in your calculations if you are using the diminishing value method. However it is important to use the most appropriate method for depreciation, for your client’s circumstances. You can use the diminishing value method, with the new higher rates, and concentrate deductions in the initial years in which the asset is held, thereby reducing the cost of investing in depreciable assets over their effective lives. However, over the long term, whether you use the prime cost method or the diminishing value method, the amount claimed would be the same.

This new amendment seeks to improve the international competitiveness of Australian businesses and follows the recent International Comparison of Australia’s Taxes review, which found that depreciation allowances in Australia were not as favourable as in other comparable OECD countries.

To see how this could work for your clients, let’s look at an example based on a small factory with a showroom at the front, with a basic fit-out including bare factory and interior of showroom with carpets, blinds, vinyl flooring and a computer system, assuming each article is valued at over $1000.

TABLE 1: Example at the rate of 150% depreciation

Effectively, what the new rate means is that businesses will be able to more quickly write off the cost of plant and equipment for tax purposes, reducing the cost of their investments over time. The new rates also make Australia’s position in relation to business depreciation more comparable internationally.

The Treasurer, Peter Costello described it in the following terms when introducing the Budget.

“The measure is equivalent to a 33 per cent increase in the allowable depreciation rate for all eligible assets. For example, for an asset with a ten-year effective life, the annual rate of depreciation will increase from the current rate of 15 per cent to 20 per cent.”

Returning to our example of a factory with showroom, the following table illustrates the plant and equipment typical of that environment and looks at the changes to plant and equipment rates.

TABLE 2: Example at 200% depreciation, showing the

increase in depreciation benefits

TABLE 3: Example P&E rate changes

Assuming value of individual item is over $1,000

(i.e. not eligible for immediate write off or low asset pool)

So you can see in all cases the depreciation claimable increases.

The new depreciation arrangements in addition to other initiatives announced in the Budget are good news for Australian businesses of all size and offer a more rapid tax benefit on investments.

If you have questions about the changes or we can assist with a comprehensive depreciation schedule for you or your clients, please call us on 1300 888 489.