The Australian government has ushered in what it termed a "significant improvement" in the depreciation arrangements for businesses based in the country, which are designed to take account of new technology.
Under the changes, introduced as part of the 2006/7 budget, the diminishing value rate under the uniform capital allowance (UCA) regime for determining depreciation deductions has been increased from 150 per cent to 200 per cent for all eligible assets. This is equivalent to a 33 per cent increase in the allowable depreciation rate for these assets.
"By increasing the incentive to invest in new plant and equipment, the measure ensures businesses can keep pace with changes in technology and remain competitive," explained Treasurer Peter Costello.
He added that the measure encourages efficient investment by ensuring that depreciation deductions for income tax purposes more closely reflect an asset’s actual decline in value.
"This will enhance productivity and help sustain strong economic growth," Costello claimed.
Under the UCA regime, a taxpayer can use the diminishing value method for depreciating assets. Under the new approach, taxpayers are able to claim a tax deduction for a fixed proportion of the written down value for an asset each year. The proportion they are able to write off is determined by the diminishing value rate and the asset’s effective life. This reflects that the asset’s value declines more rapidly in the initial years in which the asset is held.
"Increasing the diminishing value rate from 150 per cent to 200 per cent will increase the tax deductions that taxpayers can claim early in an asset’s effective life, reducing the cost of holding the asset in net present value terms," Costello stated.
The measure will apply to assets used for a taxable purpose acquired on or after 10 May 2006. This includes assets that taxpayers start to hold (for example, through leasing arrangements) for the purposes of the UCA regime.
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