Depreciating assets tend to be those bought for larger sums of money and intended by the entity that purchases them to be used over a long period of time, generally a number of years. They can include items such as:
- Cars and other vehicles
- Plant & Equipment
- Computers & servers
- High-value tools
It is important to note that all of the above items are tangible and that only a few intangible items, such as in-house software can be included as depreciating assets.
It is also worth noting here that the entity the owns the asset is generally the one which is eligible to claim the reduction in value of the asset against assessable income as a deduction in their tax return. If you are leasing the assets from a hire company, and the asset is claimed by them, you will just need to claim the hire costs and not the depreciation of the asset itself.
One of the most important aspects of calculating the depreciation charge is the useful life of the asset. This can be very different depending upon the asset itself. For example, a building would be expected to have a longer useful life than a computer. While you are able to estimate the effective life yourself, there is a Commissioners Determination which lays out a large number of assets and the useful life deemed to be applicable.
If you did wish to make your own estimate, some of the factors to consider are:
- Physical life
- Manufacturers specifications
- Prior experience of assets of this type either by you directly or others that have used them
- Retention periods
- Scrapping or abandonment practices
Once you have determined the useful life of the asset you then have to determine which calculation method to use. The Prime Cost method uses the original purchase price and equally divides it by the number of periods of useful life. The Diminishing Cost method bases its calculation on the net book value of the asset at the end of the prior period. Without going into the detail of each calculation of each, as that isn’t the point of this blog post, the Prime Cost method will equally split the total cost while the Diminishing Value method will front-load the deductions as it based on a percentage of the value at the end of each year. As always, make use of your tax advisors when making these decisions, in order to ensure you have purchased and managed these assets in the most effective manner.