“When trying to decide if you can claim a tax deduction for expenditure, there is one golden rule: so you can claim a deduction, you must have income,” says chartered accountant GAIL FREEMAN.

Alex has spent $50,000 on a secondhand forklift to start a new business. He has sent it away for an $80,000 upgrade. 

“I can’t use the forklift until the upgrade is done, which I expect to be within the next two or three months,” Alex said.

“I was hoping you could tell me I can claim the $80,000 upgrade against my other income as a repair.”

Unfortunately, the upgrade is classed as an initial repair, I told him, and that cost would be added to the $50,000 he had already spent on the forklift, which would then be its total cost for depreciation purposes. “Therefore, we will use $130,000 as the cost of the forklift,” I said.

“The ATO specifies the effective life for a forklift at 10 years. You may be able to choose a different effective life. But you would have to have a good reason. Personally, I would stick with the ATO’s effective life of 10 years.

“When trying to decide if you can claim a tax deduction for expenditure, there is one golden rule: so you can claim a deduction, you must have income. 

“As you are not expecting any income for at least three months, any items you buy in this period would need to be depreciated. The tax act specifies that to be able to depreciate an item, it must be either being used or ‘installed ready for use’. Clearly the forklift is not yet ready for use.”

Alex said there were also a few accessories he would like to buy, such as forks, hooks and buckets. 

“I am also thinking of buying a vehicle to transport the forklift to the various jobs. I expect the accessories to cost less than $20,000 each and the trailer to cost about $120,000.”

I said there was one piece of good news. Finally the government had agreed that any item of plant and equipment purchased by a small business and costing less than $20,000 can immediately be written off. “So, the forks, hooks and buckets should all be written off in full as soon as they are purchased,” I said.

“The trailer will also have to be depreciated because of its price, and again we will look at the ATO’s table of effective lives to work out the best way of depreciating that trailer for you.

“It is probably a good idea to confirm that you have an ABN, a business name and that you know you will need to be registered for GST and will have to lodge a quarterly BAS.

“We can talk about that when you are ready to start your business. It does sound exciting and I wish you well.”

If you need any information on setting up a business, purchasing depreciable assets or tax deductions contact the expert team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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