TAXN201 WK10 L19-20 Depreciation

Question 1

What is the book value/carrying amount called for tax purposes?

Answer 1

The adjusted tax value

Question 2

When is the straight-line method used?

Answer 2

When the future economic benefits of the asset are expected to be received evenly over the useful life of the asset

Question 3

When is the diminishing value method used?

Answer 3

When more of the future economic benefits of an asset are expected to be received in the earlier years of its useful life and less in the later years.

Question 4

How does the diminishing value method compare to the straight-line method?

Answer 4

The diminishing value method tends to result in a higher depreciation expense initially compared to the straight-line method

Question 5

How is an amount of depreciation loss treated for tax purposes?

Answer 5

s DA 1(1) and (2) allows a deduction for a loss, including an amount of depreciation loss. Although s DA 2(1) denies a deduction for a loss to the extent to which it is of a capital nature, s DA 4 overrides the capital limitation and allows a deduction for an amount of depreciation loss.

s DA 1(1)
A person is allowed a deduction for an an amount of expenditure or loss, including an amount of depreciation loss.
s DA 2(1)
A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a capital nature.
s DA 4
The capital limitation does not apply to an amount of depreciation loss merely because the item of property is itself of a capital nature.

Question 6

What does s EE 1(2) state?

Answer 6

A person has an amount of depreciation loss for an item for an income year if-
(a) the person owns an item of property, described in sections EE 2 to EE 5; and
(b) the item is depreciable property, described in sections EE 6 to EE 8; and
(c) the item is used, or is available for use, by the person in the income year; and
(d) the amount of depreciation is calculated by the person, the item, and the income year, under sections EE 9 to EE 11

Question 7

What three characteristics must be met for a person to have a depreciation loss?

Answer 7

1. Item of property must be owned
2. Item of property is depreciable
3. Item of property is used, or available for use in the income year

Question 8

What does s EE 2 state?

Answer 8

Nature of ownership
Kinds of ownership
(1) Own, for the ownership of depreciable property, -
(a) means legal or equitable ownership; and
(b) includes ownership of the kinds described in sections EE 3 to EE 5

Question 9

What does ownership of property include?

Answer 9

Legal or equitable ownership

Question 10

What does s EE 6 state?

Answer 10

(1) Depreciable property is property that, in normal circumstances, might reasonably be expected to decline in value while it is used or available for use -
(a) in deriving assessable income; or
(b) in carrying on a business for the purpose of deriving assessable income; or
(c) in deriving exempt income, and is used in performing research and development activities

Question 11

What is depreciable property?

Answer 11

Property that in normal circumstances might reasonably be expected to decline in value while used or available for use

Question 12

What are low value assets?

Answer 12

Low value assets are assets whose cost falls within the low value asset threshold and cannot be capitalised and depreciated so must be expensed

Question 13

What is the present low value asset threshold and two low value asset thresholds before the current one?

Answer 13

Prior to 17 March 2020, $500
17 March 2020 to 17 March 2021, $5,000
Post 17 March 2021, $1,000

Question 14

What was the purpose of increasing the low value asset threshold from $500 to $5,000 on 17 March 2020 to 17 March 2021?

Answer 14

To encourage businesses to spend by allowing them deductions for expenditure on purchasing assets with a cost of less than $5,000 to stimuate the economy

Question 15

What is the definition of the diminishing value method?

Answer 15

The method of calculating an amount of depreciation loss for an item of depreciable property, by subtracting, in each income year, a constant percentage of the item’s adjusted tax value from the item’s adjusted tax value

Question 16

What is the definition of the straight-line method?

Answer 16

The method of calculating an amount of depreciation loss by subtracting, in each income year, a constant percentage of the item’s cost, to its owner, from the item’s adjusted tax value.

Question 17

What is the rule for changing methods?

Answer 17

You cannot change depreciation methods during an income year.
When changing depreciation methods, the adjusted tax value must be carried forward. When changing from the diminishing value method, to the straight-line method, the adjusted tax value is treated as the new cost of the asset.
You cannot change depreciation methods from the pool method.

Question 18

What is the formula used for calculating the amount of depreciation loss when using the diminishing value and straight-line method?

Answer 18

annual rateadjusted tax value or costmonths/12
where
(1) the annual rate is the rate that applies to the item of depreciable property under the depreciation method that is ued for the item in the income year
(2) the value or cost is-
(a) when using the diminishing value method, the item’s adjusted tax value at the end of the income year before the deduction of the amount of depreciation loss for the item
(b) when using the straight-line method, usually the cost of the item
(3) months is the lesser of
(a) 12; and
(b) the number of whole or part calendar months in the income year in which-
(i) the person owns the item; and
(ii) the person used the item, or has it available for any purpose

Question 19

What is the purpose of the pool method?

Answer 19

To reduce compliance costs. Items with similar rates are pooled together

Question 20

What is the formula used to calculate the amount of depreciation loss when using the pool method?

Answer 20

rate*((starting adjusted tax value - ending adjusted tax value)/2) * [months/12]
where
(1) the rate is the diminishing value rate. it is one of the following
(a) if the same rate applies to all items of the depreciated pool in the income year, that rate; or
(b) the lowest rate of the items in the pool
(2) starting adjusted tax value is-
(a) the pool’s adjusted tax value at the start of the income year; or
(b) zero, if the pool did not exist at the start of the income year
(3) ending adjusted tax value is-
(a) the pool’s adjusted tax value at the end of the income year before the deduction of an amount of depreciation loss for the pool for the income year; the pool’s opening adjusted tax value plus any additions to and minus any removals from the pool during the income year before the deduction of an amount of depreciation loss for the pool for the income year
(4) months is the number of whole or part months in the income year, and the number may be more or less than 12; only necessary if the business was formed during the income year

Question 21

What happens when an asset is sold at a price higher than its adjusted tax value but lower than its cost?

Answer 21

The difference between the adjusted tax value of the asset and the price at which the asset was sold is called depreciation recovery income and is taxable.
The purpose of this is to reverse the deductions claimed on the depreciation of the asset.
The residual value of the asset was over-estimated and therefore the depreciation of the asset was over-stated, so deductions on depreciation were claimed that should not have been.

Question 22

What happens when an asset is sold at a price less that its adjusted tax value?

Answer 22

The difference between the adjusted tax value of the asset and the price at which the asset was sold is called loss on disposal and is deductible.

Question 23

What happens when an asset is sold at a price higher than its adjusted tax value and higher thant its cost?

Answer 23

The difference between the adjusted tax value of the asset and the cost of the asst is depreciation recovery income and is taxable.
The difference between the cost of the asset and the price at which it was sold is a capital gain and is not taxable

Question 24

What is the rule for depreciation on disposal of assets?

Answer 24

No depreciation deduction is allowed in the year of sale of an asset