Sadly too many SMEs are likely paying more tax than they need to because of a lack of understanding around depreciation claims.
Speaking with My Business, CEO of BMT Tax Depreciation Brad Beer says business owners commonly “miss out on deductions all over the place”.
“I think the fundamentals of depreciation aren’t actually understood very well, especially in buildings,” says Brad.
“Some things about depreciation ... if you’ve got a receipt, you bought a photocopier, other than splitting it up between personal use if relevant, it’s quite simple. But when it comes to buildings and structures and fit-outs, there’s a lot of things that are a lot more complex.”
As Brad points out, the ATO puts a lifespan on assets used as part of a company’s operations – including everything from the building down to a laptop – but the lifespan for every asset is different. The complexity often arises around fit-outs, for example, where a contractor simply provides one invoice that covers a range of depreciable materials, such as carpets, furniture, structures and appliances.
Where SMEs most commonly overlook deductions
According to Brad, there are three main areas SMEs commonly don’t claim legitimate deductions – meaning they are paying the tax man more than they really need to:
Underclaiming depreciable assets
The complexity around dividing up various assets into their relevant components often leads people to omit claims, or bundle deductions together.
Doing so, says Brad, can mean you receive lower rates of depreciation than you are legitimately entitled to.
“Even if you have the total of the costs and just claim things at a slower rate than you could, then you’re still leaving some money on the table for the long term,” he says.
You may be surprised to learn that you are, in effect, literally throwing away money when it comes to disposing of assets.
“A big component in any property is making sure you take advantage of something that we call scrapping – it’s not the tax office word for it, but it’s simple to understand,” explains Brad.
“If there [are] things within any property or within a fit-out that are depreciating and aren’t fully claimed yet, and you throw them away – scrap them – whatever value is left on those things is something that is an instant deduction, usually in that year that you throw it away.”
Take, for instance, carpet in an office. It needs to be replaced because the high-traffic areas have worn out 18 months before the tax office’s stipulated lifespan on carpet. There remains 18 months’ worth of depreciation that can still be claimed on that carpet.
“If you decide to throw it away before that life, you also get to claim the rest because you’re not using it for that business anymore and the life of that item is finished for you and that business. So whatever is left – claim it.”
As such, Brad advises exploring your depreciation schedule before throwing out any business item to determine whether there is any depreciable life left in the item.
Another area of depreciation which Brad says is underutilised by SMEs comes to assets acquired midway through their lifespan.
“Talking about a potential new purchaser ... if it’s transferred at a certain value, then it continues to depreciate,” he says.
As such, if you purchase an established property or secondhand piece of equipment, you become entitled as the new owner to claim any remaining depreciation valid on that item.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.