The governments temporary full expensing of assets has changed the concept of depreciation. If your family business buys an asset it is deductible in full the year it is ready and it is not expensed over its useful life.
Classically the tax depreciation of an asset roughly lined up with the time-period that the asset was going to be used. The “useful life” of an asset is a key tax component of enjoying tax depreciation on purchasing in Perth and the regions. So many business operators simply adopted the same tax rates as the rates for reporting as the net position was roughly the same.
That is not the case anymore.
The concept of asset depreciation is well known among family businesses across Perth. And a depreciation schedule has several benefits. It expensed the benefit of an asset over the time period that the asset was also used in preparing the annual income tax return for ATO reporting.
For example: a Perth business generated a great profit. So it upgrades its fleet of trucks and cars it will enjoy an immediate tax deduction for the cars. If the business owner runs the same depreciation schedule for financial year the great profit outcome will know show that the business is losing money.
The following are reasons why you should consider running a separate tax depreciation schedule and a fixed asset register.
Gone are the days when a depreciation schedule is a complex work of art with excel. Many software programs like Xero run both a tax depreciation schedule and a fixed assets register within the one report.
Once a business gets to a certain size you can only understand its performance through the numbers. So getting a fixed asset register so you capex budget is controlled and your gross profit margins are stable is an important step to controlling a business.
Creating stable reports means that you can get stable ratio’s. And that then allows you to focus on creating and tracking financial KPI’s in your business.
The business reports are a primary reference source for a new owner. And if you can show the owner a stable reporting platform and the inbuilt investment into the business through fixed assets you can present a better governance and control to an outsider.
A significant user of the accounting reports is your bank. And the less adjustments a banker needs to make to understand your business the better off your bank application will be.
Getting a complete fixed asset register without wild fluctuations in your depreciation costs will make your finance applications a lot cleaner.
When it comes to insuring your equipment it helps to understand what equipment you own. A fixed asset register is often a first source for a broker to review so they can understand the equipment you need to insure.
Every business tax return requires that the accounting depreciation is removed and the tax depreciation is then claimed. This is the case even if you run a tax depreciation schedule that is the same as your accounting depreciation schedule.
The use of two schedules (tax and business) does not significantly complicate the tax return preparation process.
At different points in time your extended family members will want to understand the business. It might be through your structured family AGM, a succession event or (sadly) a divorce.
If your reports make sense without wild and massive depreciation adjustments your family users of your reports will be better placed to engage with the primary family owner.
Running a business is difficult. The amount of information and mental headspace you can allocate to different tasks is precious.
As a guide the more mental adjustments you need to make to your reports the more difficult it is to understand them. If you can understand a report in a short amount of time you are more likely to review it and focus on understanding the implications of that report.
If you are reading financial reports and investing your energy into understanding the reasons why adjustments are necessary you will not be focused on the ultimate implications of your reports. Getting a clear report without adjustments will make your life easier.
At Westcourt we are Xero Gold Champions, QBO Accredited Advisors and fluent across a range of software platforms and their fixed asset registers. Importantly we are independent of the platforms and agile in how you want to tailor your reporting for your business and also for the needs of your family.
We also understand that many internal bookkeepers, office managers, accountants, financial controllers and CFO’s are under-resourced and probably not wanting to add extra work for what they are doing. So we are committed to simplifying the process as much as possible to help these people out and collaborate with what they are doing.