Question

Trickster Holdings purchased an asset costing $1,935,558. Freight costs of $67,652 and installation costs of $14,504 were also required to place the machine in an operational state.

The firm expects to use the asset for 6 years and the Taxation Office advises the asset has a useful life of 4 years.

Calculate the depreciation tax benefit/saving (to the nearest whole number ignoring the $ sign) that will apply in each allowable year.

The Australian Company Tax Rate applies.

Answer 1

First we find the total value of assets on which depreciation can be claimed.

Asset is capitalised for the costs incurred to make it operational. Hence, freight cost and installation cost shall be added to the cost of machinery as this were necessary to make the machinery operational.

Total Cost of machinery = 1935558+ 67652 + 14504 = 2017714

Now we determine the number of years to be considered during which asset shall be depreciated.

We cannot take the expectation of the firm to use the asset, but Taxation Officer judgement of 4 years shall be used

Hence Depreciation each year = Total Assets/ Number of  Years = 2017714 / 4 = 504428.50

Hence Tax Savings = 504428.50*30% = 151328.55 each year