Depreciation is a key concept in business accounting and taxation, but many business owners are unclear about how it really works—especially the difference between accounting depreciation and tax depreciation, and what happens when you sell an asset. Let’s break it down.
Accounting vs Tax Depreciation
Accounting depreciation is used for internal reporting purposes. It spreads the cost of an asset over its useful life, based on how long the business expects to use it. For example, a $10,000 computer system might be depreciated at $2,000 per year over five years.
Tax depreciation, on the other hand, follows rules set by the Australian Taxation Office (ATO). The ATO allows you to claim deductions for the decline in value of assets used in your business. These deductions are calculated differently from accounting depreciation and can be more beneficial for reducing taxable income.
Accelerated Depreciation
Over the past few years the ATO has offered methods like the instant asset write-off and temporary full expensing, which allow eligible businesses to immediately deduct the full cost of an asset, rather than spreading it over several years. This is known as accelerated depreciation and can provide a significant cash flow benefit.
However, using accelerated depreciation reduces the asset’s tax written down value (WDV) quickly—sometimes down to zero in the first year.
Selling an Asset: Tax Consequences
If you later sell an asset for more than its tax written down value, the difference is considered assessable income. For example, if you fully depreciated a vehicle for tax purposes and then sold it for $5,000, that $5,000 must be reported as income in your tax return.
This is known as a balancing adjustment. Conversely, if you sell the asset for less than its written down value, you may be able to claim an additional deduction.
Final Thought
Understanding these depreciation rules helps you plan for both tax savings and future obligations. Speak to one of our accountants to ensure your depreciation strategy aligns with your business goals and compliance requirements.
