This information explains the simplified depreciation rules. Small businesses can use these rules as an alternative to the uniform capital allowances rules to work out deductions for most depreciating assets.
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When we say ‘business’ we mean the individual, partnership, company or trust that carries on the business activity.
When we say ‘small business’ we mean ‘small business entity’, which is an individual, partnership, trust or company with aggregated turnover less than $2 million.
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In general, you can:
- immediately write off most depreciating assets costing less than $1,000 each (low-cost assets)
- pool in a general small business pool and deduct at the rate of 30% most other depreciating assets with an effective life of less than 25 years, such as motor vehicles and computers
- pool in a long-life small business pool and deduct at the rate of 5% most depreciating assets with an effective life of 25 years or more, such as wharves and cement silos, and
- deduct most newly acquired assets at either 15% or 2.5% in the first year, regardless of when they were acquired during that year.
You cannot use these rules for some assets. If you choose to use the simplified depreciation rules, you must use them to work out deductions for all your depreciating assets that the rules apply to.
If you have non-business income, such as salary and wages, you will also claim a deduction for depreciating assets you use in earning your employment income under these simplified depreciation rules.
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Depreciation for fringe benefits tax (FBT) exempt items
In the 2008 Budget the government announced that for items purchased after 7.30pm (AEST) on 13 May 2008 it will pass new legislation to deny employees depreciation deductions for FBT-exempt items (including laptop computers, personal digital assistants and tools of trade).
The government has also announced that for items purchased before 7.30pm (AEST) on 13 May 2008, employees will be not be able to claim depreciation for the 2008-09 and later income years.
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Where you can claim a goods and services tax (GST) credit for a depreciating asset, you must deduct the amount of the GST credit from the asset’s adjustable value before working out the deduction for depreciation. The examples here use GST-exclusive figures.
Low-cost assets
A low-cost asset is one whose cost at the end of the year you first used it (or installed it ready to use) for a taxable purpose is less than $1,000 (excluding horticultural plants). You use an asset for a taxable purpose if you use it to produce assessable income.
You can claim an immediate deduction for low-cost assets in the income year that you first use those assets, or install them ready to use, for a taxable purpose. However, you can only claim the immediate deduction if you acquired the asset during a year in which you are a small business choosing to use the simplified depreciation rules.
Small business pools
You allocate to a small business pool:
- most depreciating assets costing $1,000 or more that you acquire in the year that you use the simplified depreciation rules, and
- most depreciating assets that you held before you used the simplified depreciation rules.
There are two pools:
- the general small business pool – for assets with an effective life of less than 25 years, and
- the long-life small business pool – for assets with an effective life of 25 years or more.
Generally, the effective life of an asset is the period you or anyone else can use it for a taxable purpose or for the purpose of producing exempt income, assuming reasonable wear and tear and levels of maintenance.
If you held any assets at the start of the income year that you chose to use these rules, you must generally allocate them to a pool at the beginning of that year.
If you started to hold depreciating assets costing $1,000 or more during the year you chose to use these rules, you must allocate them to a small business pool at the end of that year.
Taxable purpose
You must estimate (as a percentage) how much you will use a depreciating asset for a taxable purpose – for example, for producing assessable income.
You must make a new estimate of the taxable purpose proportion of each asset allocated to:
- the general small business pool – for each of the first three years after the year you allocated it to the pool, and
- the long-life small business pool – for each of the first 20 years after the year you allocated it to the pool.
Adjustable value
You must work out the adjustable value of each depreciating asset you start to use, or have installed ready to use, for a taxable purpose. Broadly, the adjustable value of an asset is its cost less its decline in value since you first used it, or installed it ready to use, for any purpose whether business or private. The asset’s cost does not include any amount that you can claim as a GST credit.
For assets you held before starting to use these rules and for which you have been claiming deductions under the general capital allowance rules, use the asset’s adjustable value at the end of the previous year.
Allocate the taxable purpose proportion of the adjustable value of each asset costing $1,000 or more to the appropriate pool, then depreciate each pool as a single asset.
Last Modified: Monday, 30 June 2008
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