What do you do if you have an upgrade to an existing asset you hold and the cost of the upgrade is properly characterised as a second element cost and not a separate depreciable asset in its own right?
The prime cost formula for tax depreciation can be broadly summarised as:
An asset’s cost X number of days held for an income year X yearly tax depreciation rate (which is based on the asset’s effective life).
However section 40-75(2) requires taxpayers to adjust the basic prime cost formula for an income year (the change year) where, amongst other adjustment events, an amount is included in the second element of an original asset’s cost. The adjustments are:
- instead of the asset’s cost, you use its opening written down value (WDV) for the year plus the second element amount incurred during the change year
- instead of the asset’s effective life, you use its remaining effective life to depreciate the remaining asset’s balance. An asset’s remaining effective life is any period of its effective life that has yet to elapse as at the start of the change year.
The adjustment applies for the change year and subsequent years.
As we have just past 31 December and with 30 June fast approaching it may be worth re-examining your fixed asset register to ensure your tax depreciation claim for the year has been accurately calculated particularly where assets have been upgraded.