By Max Newnham
Small businesses, those that have a total annual income turnover of less than $10 million, can use the simplified depreciation rules. They can also use the cash method of accounting, rather than the accrual method, for calculating the profit or loss each year.
Under the cash method a business only pays tax on income it receives, and only claims a tax deduction for expenses paid. Under the accrual method a business accounts for all income it earns in an accounting period, and claims a deduction for all costs that have been incurred or are owed.
Businesses that want to accurately monitor their performance should use the accrual method of accounting for management purposes, but if they qualify as a small business can use the cash method for income tax purposes.
When it comes to accounting for the cost of assets, and the owners of the business want to accurately reflect the write-off of those assets against the income, the cost should be claimed over the expected useful life of the assets.
Just as a small business can use the accrual method for management purposes, and the cash method for income tax purposes, an eligible small business can use the useful life method for management purposes and the simplified depreciation small business asset pool method for tax purposes.
Q. I understand that there is a depreciation cost limit for motor vehicles. If I buy a car for $99,000 that is used 100 per cent for business, and then sell it four years later for $66,000, what is the GST treatment and how will the depreciation cost limit affect the treatment of the sales proceeds received?
A. The amount of GST input tax credit that your business can claim on the car will be limited to $5325, being one eleventh of $57,581. With regard to the cost that can be used for depreciation purposes, this will be limited to $57,581.
After claiming the GST input tax of $5325, and taking into account the $57,581 cost of the car included in the small business asset pool, this will leave a non-depreciable cost for the car of $36,094. This non-depreciable cost equals 38.5 per cent of the after GST cost of the car.
In the first year of buying the car depreciation claimable will be 15 per cent for $57,581. As the car will be in the small business asset pool the depreciation claim for each subsequent year will be 30 per cent.
If you sell the car after four years for $66,000 you must include $6000 of GST received on the BAS in the quarter that the vehicle is sold. Under the small business asset pool rules the value received, relating to the depreciable cost of the asset, is used to decrease the value of the small business asset pool.
This would mean $36,900, being 61.5 per cent of $60,000, would be deducted from the value of the small business asset pool. If this results in the small business asset pool having a negative value, this value is shown as assessable income in that year.
Source: The Age
