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Inland Revenue's logo appears, together with the series name "An Introduction to Business" below. Next, the title of the video "04 Depreciation " appears.
"An introduction to business. Depreciation. When you start out in business, you’ll need to know about depreciation. In this video, we explain what it is and how you calculate it."
A van drives onto the screen and receives a scratch as it passes a street light. After a short journey, the van pulls up outside a motel.
"Depreciation recognises that your fixed assets lose value as a result of normal wear and tear. You treat depreciation like an expense and deduct it from your gross income when you do your income tax return."
The camera zooms in on the motel. Andy is pictured at his desk, working on his computer. Stationery items on his desk, and a lightbulb dropping down from the ceiling, are highlighted to indicate common revenue expenses. Next, the two computers on the desk are highlighted as examples of capital expenses.
"Before we go any further, you need to understand the difference between revenue and capital expenses."
"Andy’s motel, like most businesses, has both types."
"Revenue expenses are things used in the day-to-day running of the business, like stationery, rent and power. Generally only revenue expenses can be deducted in your tax return."
"Capital expenses are generally fixed assets that you keep in your business for longer than a year. Common examples include computers, motor vehicles, and machinery."
The camera zooms in on one of the computers. Text appears on the computer's screen: "Depreciation", then "Revenue or capital expense?". Next, you see a summary of the test for a capital expense: "More than $500?" and "Life more than 12 months?". Finally, the screen shows an image of a fixed asset register.
"In most cases, you can't claim a deduction for a fixed asset - instead you claim depreciation."
"If you're not sure whether an item is a revenue or capital expense, ask yourself these two questions. Is it worth more than $500? And does it have an expected life of more than 12 months? If your answer to both questions is "yes", the item is probably a capital expense."
"If you own business fixed assets, you need to keep a register showing the cost price of the asset, the depreciation claimed, and the adjusted tax value."
"The adjusted tax value is the cost price less the depreciation claimed."
Andy walks onscreen and picks up a computer from a table. A bubble shows the computer is worth $2500. Then a calendar with "Mar 31" displayed appears, and two new bubbles show graphs representing the diminishing value method and the straight line method.
"Andy has just bought a new computer for the motel. As it's worth over $500 and likely to last longer than 12 months he knows it's a fixed asset and he must depreciate his computer."
"After the end of the tax year, it's time for Andy to depreciate his new computer. Depreciation rates are based on the expected life of the asset. In most cases, you can choose either the diminishing value or straight line method to calculate depreciation."
The straight line method bubble fades out leaving the diminishing value method bubble alone on the screen. Then the messages "Adjusted tax value" and "50% D.V." appear.
"With the diminishing value method, you work out the depreciation on the adjusted tax value of the asset. You'll have a larger depreciation deduction initially, but your deductions will diminish every year."
"Andy uses Inland Revenue's online depreciation rate finder and finds computers have a diminishing value rate of 50%."
The diminishing value method bubble fades and the straight line method bubble reappears. A message "Cost price" drops down, followed by the message "40% S.L".
"With the straight line method, depreciation is calculated on the cost price of the asset. That means your depreciation deduction is the same every year."
"The depreciation rate finder shows the straight line rate for computers is 40%."
"Andy must decide. Diminishing value? Or straight line?"
A sloping line appears, illustrating your diminishing claims under the diminishing value method. A counter shows years counting forward to "12 years". Next, a straight line moves horizontally across the screen, illustrating your constant claims under the straight line method. A counter shows years counting forward to "3 years".
"If he chooses diminishing value, he can claim a bigger deduction in the first year, but it will take 12 years to fully depreciate the computer."
"If he chooses straight line, the computer will be depreciated in just three years."
Andy's van drives up and parks outside the motel. Andy puts a sign on the van reading "Motel", indicating his van is now a business asset. A bubble appears showing "Market value" then "Independent valuation". A set of records appears, reminding you to keep a record of your valuation.
"If you already own an asset and introduce it into your business, you can claim depreciation on the market value of the asset. The best way to determine market value is to get an independent valuation. Andy received a valuation for his van from a local car dealership. Please make sure you keep a record of any valuation you obtain."
An image of a fixed asset register appears. Andy puts a "For sale" sign on his van. The numbers "$600" and "$500" pop up on the screen.
"If you sell a fixed asset, you compare the sales price to the asset's adjusted book value in your fixed asset register. Any gain is taxable, and any loss is deductible."
"Andy decides to sell his van. He puts an ad in the paper and after two weeks, the van sells for $600. The van had an adjusted tax value of $500, so Andy includes the $100 gain as income in his tax return."
We see the motel, with a TV appearing in every window. All TVs move together into a circle. Then Andy's computer joins the TVs in the circle, and rates of depreciation are added to the images: 40% to the TVs and 50% to the computer. The 50% vanishes and only the 40%s are left. A bubble shows a fixed asset register, then an image of records.
"If you have a group of assets worth $5,000 or less, you can often combine them into a pool and depreciate them as though they were a single asset. When pooling assets you must use the diminishing value method."
"Andy's motel has a TV in every room and he realises his life will be a lot easier if he pools the TVs and does one depreciation calculation, on the combined value of all the TVs."
"As a pool can contain different types of assets, Andy can add his new computer once its adjusted tax value is under $5,000."
"Because Andy has a mix of assets with different rates, he must use the lowest diminishing value rate for all the items."
"Please remember to keep a fixed asset register, and records of all your depreciation calculations. If you don't, you won’t be able to claim any depreciation in your tax return."
The closing sequence. Inland Revenue's website address is shown, and useful information on the website is listed below: Depreciation rate finder, Depreciation claim finder, and the Tool for business. Business.govt.nz's web address follows, with a mention of the start-up health check available.
The video ends with Inland Revenue's logo and web address, and a footer reading "New Zealand Government".
"This video has given you a quick overview of depreciation. Please visit our website for more information."
"Our tools and calculators can make calculating your depreciation a lot easier."
"Go to business.govt.nz to access further tools and resources for starting in business."