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Wear and tear allowance: Declaring assets for accounting vs. the tax treatment

by , 27 February 2014
When it comes to wear and tear allowances, there's a difference between the way you declare assets on the accountant's statement of financial position and the way you declare them for taxes. Read on to find out more about this.

The good thing about the wear and tear allowance is that you can claim tax deductions against your income and save some cash.

And as you know, not all assets qualify for the allowance. You must own the assets, or have acquired them under an 'installment credit agreement'.

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This, according to the Practical Tax Loose Leaf Service means buildings, structures or works of a permanent nature don't qualify for the wear-and-tear allowance.

For assets that do qualify, it's important you understand the difference in how assets are declared for accounting purposes and for tax purposes.

Explained: The difference between declaring assets on the accountant's statement of financial position and declaring them for taxes

Point #1:

  • Declaring for accounting statement: Here you measure and value the asset with the expectation that it'll give rise to future economic benefits.
  • Declaring for tax: You must recognise the capital spend and not only the asset. You also recognise the asset at the cost you incurred. You base the wear-and-tear allowance on the 'value' of that asset.

Point #2:

  • Declaring for accounting statement: You must calculate the residual value of the Asset.
  • Declaring for tax: While the capital asset is the same as that found on the accountant's statement, you don't recognise the same residual value.

Point #3:

  • Declaring for accounting statement: You have to recognise the depreciation of the asset over the expected useful life of the asset.
  • Declaring for tax: Here you don't recognise depreciation, so don't claim any tax deduction for depreciation.

Point #4:

  • Declaring for accounting statement: In accounting, the asset could be re-valued for financial reporting.
  • Declaring for tax: With tax, the 'value' of the asset doesn't change in subsequent tax periods.

Remember, ignorance of the law is never an excuse. Now that you know the difference between the way assets are declared on the accountant's statement of financial position and the way they're declared for taxes, make sure you comply.

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