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  • Backing business investment – accelerated depreciation

    Eligible businesses, for the 2019–20 and 2020–21 income years, may be able to deduct the cost of new depreciating assets at an accelerated rate.

    For each new asset, the accelerated depreciation deduction applies in the income year that the asset is first used or installed ready for use for a taxable purpose.

    You can claim the deduction when lodging your tax return for the income year. The usual depreciating asset arrangements apply in the subsequent income years that the asset is held.

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    Eligible businesses

    Businesses are eligible for the accelerated depreciation deduction if they have an aggregated turnover of less than $500 million in the year they are claiming the deduction. The accelerated depreciation deduction is available in the 2019–20 and 2020–21 income years.

    Businesses can claim the deduction when lodging their tax return for the income year the asset is first used or installed ready for use for a taxable purpose.

    Eligible assets

    To be eligible to apply the accelerated rate of deduction, the depreciating asset must:

    • be new and not previously held by another entity (other than as trading stock)
    • be first held on or after 12 March 2020
    • first used or first installed ready for use for a taxable purpose on or after 12 March 2020 until 30 June 2021
    • not be an asset to which an entity has applied the instant asset write-off rules or depreciation deductions.

    There is no limit on the number of eligible assets that you can apply accelerated depreciation to in an income year.

    Eligible assets do not include:

    • second-hand depreciating assets
    • some specific Division 40 assets subject to low value and software development pools
    • certain primary production assets
    • buildings and other capital works for which you can deduct amounts under Division 43
    • other specific capital asset and expense deductions
    • assets you were committed to acquiring before 12 March 2020.

    There is no limit on the cost of an eligible asset to which you can apply accelerated depreciation, unless it is a passenger vehicle.

    Passenger vehicles

    If you purchase a passenger vehicle (except a motorcycle or similar vehicle) designed to carry a load of less than one tonne and fewer than nine passengers, the car limit applies. You must reduce the cost of the vehicle to the car limit before calculating your depreciation. You cannot claim the excess cost of the vehicle above the car limit under any other depreciation rules.

    The car limit is:

    • $57,581 for the 2019–20 income year
    • $59,136 for the 2020–21 income year

    See example 3 for when the car limit applies.

    A vehicle's cost (before applying the car limit, if applicable):

    • does not include the value of a trade-in
    • excludes the GST amount if you are registered for GST
    • includes the GST amount if you are not registered for GST.

    The one tonne limit relates to the maximum load your vehicle can carry, also known as the payload capacity. The payload capacity is the gross vehicle mass (GVM) as specified on the compliance plate by the manufacturer, reduced by the basic kerb weight of the vehicle.

    The basic kerb weight is the weight of the vehicle with a full tank of fuel, oil and coolant together with spare wheel, tools (including jack) and factory-installed options. It does not include the weight of passengers, goods or accessories.

    Payload capacity = GVM – basic kerb weight

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    Research and development

    If accelerated depreciation is to be applied to the purchase of an asset used for research and development (R&D) purposes, you can only claim the R&D tax offset for the proportion of the decline in value that is for R&D use. In working out the amount in relation to R&D use, you must subtract any non-R&D use (including the taxable purpose portion and private use portion).

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    Working out your deduction

    Different rules apply when working out your deduction, depending on whether you are using the simplified rules for capital allowances for small businesses

    Small business entity

    If you are a small business with an aggregated turnover of less than $10 million, and you use the simplified depreciation rules, those assets that cost the same as or more than the instant asset write-off threshold which are eligible for the accelerated depreciation are added to the general small business pool. You then deduct an amount equal to 57.5% (rather than 15%) of the business portion of a new depreciating asset in the year you add it to the pool. In later years the asset will be depreciated under the general small business pool rules.

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    Other business entities

    If you are an entity with aggregated turnover less than $500 million in the income year and do not use the simplified depreciation rules, you may be eligible to deduct an amount if the asset is an eligible asset.

    The amount your entity can deduct in the income year the asset is first used or installed ready for use is:

    • 50% of the cost (or adjustable value where applicable) of the depreciating asset
    • plus the amount of the usual depreciation deduction that would otherwise apply but calculated as if the cost or adjustable value of the asset were reduced by 50%.

    Effectively, together with the instant asset write-off rules, the accelerated depreciation deduction applies to assets with a cost (or adjustable value if applicable) of:

    • $150,000 or more in the 2019–20 income year
    • $150,000 or more if first used or installed ready for use for a taxable purpose prior to 1 January 2021 in the 2020–21 income year
    • $1,000 or more if first used or installed ready for use for a taxable purpose from 1 January 2021 in the 2020–21 income year.

    Examples

    Example 1 – Small business benefits from accelerated depreciation

    Joan and Bruce own a company, NC Transport Solutions Pty Ltd, through which they operate a haulage business on the North Coast of New South Wales. NC Transport Solutions Pty Ltd has an aggregated turnover of $8 million for the 2019–20 income year. On 1 May 2020, Joan and Bruce purchase a new truck for $260,000, exclusive of GST. For the year ending 30 June 2020, the truck was only used for business purposes

    Under past tax arrangements, NC Transport Solutions Pty Ltd would depreciate the truck using their general small business pool. This means that NC Transport Solutions Pty Ltd would deduct 15% of the asset’s value when they added it to the pool, leading to a tax deduction of $39,000 for the 2019–20 income year (assuming there are no other assets in the pool).

    Under the new accelerated depreciation, NC Transport Solutions Pty Ltd will instead claim a deduction of 57.5% when they add it the pool, leading to a deduction of $149,500 for the 2019–20 income year.

    End of example

     

    Example 2 – Middle-sized business benefits from accelerated depreciation

    J Construction Solutions Pty Ltd has an aggregated turnover of $200 million for the 2020–21 income year. On 1 July 2020, J Construction Solutions Pty Ltd installs a $1 million truck mounted concrete pump. For the year ending 30 June 2020, the pump was only used for business purposes.

    Under past tax arrangements, in the first year J Construction Solutions Pty Ltd could claim 30% depreciation when using the diminishing value method (based on the asset’s effective life of six and two thirds years).

    Under the new accelerated depreciation, J Construction Solutions Pty Ltd can claim a depreciation deduction of $650,000 in the 2020–21 income year. This consists of 50% of the concrete pump’s value under the new accelerated depreciation ($500,000) plus 30% of the remaining $500,000 under existing depreciation rules ($150,000).

    End of example

     

    Example 3 – Business purchases cars and utes in 2020–21 and claims accelerated depreciation

    J Construction Solutions Pty Ltd has an aggregated turnover of $200 million for the 2020–21 income year and is registered for GST purposes.

    On 1 September 2020, J Construction Solutions Pty Ltd purchases a fleet of five new cars (five seaters) costing $80,000 each and three new work utes with carrying capacity over one tonne costing $70,000 each. For the year ending 30 June 2021, the vehicles were only used for business purposes. The amounts shown here exclude GST.

    As the fleet cars are passenger vehicles subject to the car limit, before J Construction Solutions Pty Ltd can calculate its depreciation for 2020–21, they must first reduce the cost of each car to the 2020–21 car limit of $59,136.

    In the 2020–21 income year, for each car, J Construction Solutions Pty Ltd can claim a depreciation deduction of 50% of each car's cost up to the car limit. That is, $29,568 each – half of the car limit for the 2020–21 income year. They can also use the general depreciation rules for the $29,568 balance for each car applied over the life of the asset, excluding any GST. The company cannot claim the excess cost of each car above the car limit.

    However, the car limit does not apply to the work utes, as these vehicles have a load carrying capacity of over one tonne. So, 50% of the cost of each ute can be claimed immediately, and the balance of the cost can be deducted over the life of the asset under general depreciation rules.

    When reviewing its vehicle replacement program earlier in 2020–21, J Construction Solutions Pty Ltd also considered purchasing the following vehicles:

    • a truck to transport building materials (not a passenger vehicle)
    • a minivan (seating nine or more passengers) to move staff between its construction sites and
    • a seven-seater station wagon for general purposes.

    Of the above listed vehicles, the car limit would only have applied to the purchase of the station wagon, as this is classed as a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers.

    End of example

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    Last modified: 20 Aug 2020QC 61924