Much publicity after the 2016 and 2017 budgets surrounded the ability for larger businesses to claim 100 per cent depreciation on assets purchased of less than $20,000 through the reclassification of small business to incorporate companies with a turnover of up to $10 million. This is ‘small change’ compared to what has now become available to those companies under the simplified depreciation rules.
Under the simplified depreciation rules, company owners can actively elect to place all of their assets in a pool for depreciation purposes and claim depreciation rates of 15 per cent in the first year and 30 per cent in each subsequent year (on a diminishing value or DV basis).
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.
Owners of businesses in such capital intensive industries as manufacturing, transport, civil and other related fields should take heed of this depreciation bonanza, which has just become available to them commencing this current financial year.
Artarmon Cranes provides a suitable example here.
The company runs a fleet of 20 cranes, has a turnover of $8 million per annum per annum, a profit of $1 million per annum and resultant tax bill of $300,000 per annum.
The current written down value of its crane fleet is $4 million and the company has been historically depreciating their cranes at 7.5 per cent DV ($300,000) per annum, which was expensed prior to the $1 million profit.
In 2017, Artarmon Cranes (which is now reclassified as a small business) placed all of its cranes into the new simplified depreciation system before 30 June 2017. It is now claiming 15 per cent DV depreciation for the 2017 financial year and 30 per cent for 2018 and beyond on their $4 million fleet.
The depreciation in 2017 will climb from $300,000 (7.5 per cent DV) to $600,000 (15 per cent DV) with the extra $300,000 reducing the company’s taxable profit from $1 million to $700,000 resulting in its tax bill dropping from $300,000 to $210,000.
The depreciation in 2018 will climb from $300,000 (7.5 per cent DV) to $1,020,000 (30 per cent DV) with the extra $720,000 reducing their taxable profit from $1 million to $280,000 resulting in the tax bill lowering from $300,000 to $84,000.
It is important to remember the diminishing value methodology of this accelerated depreciation, which on the pictured figures chart would show the following profile for future years.
Although the example has been used for a crane company, this could easily be applied to companies that require large amounts of expensive equipment such as manufacturing, earthmoving, transport or concrete pumping companies (to name a few).
For a company involved in such capital intensive industries, which historically incur significant tax liabilities or expect to do so, it is advisable to speak with a specialist in this area or 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 does not provide formal tax advice and advises business owners speak with their accountants on these matters.