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  • Backing business investment – accelerated depreciation

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    Measures introduced in March 2020 provide an incentive to businesses with aggregated turnover of less than $500 million for the 2019–20 and 2020–21 income years, to deduct the cost of 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. The usual depreciating asset arrangements apply in the subsequent income years that the asset is held.

    Eligibility

    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)
    • not be an asset to which an entity has applied depreciation deductions or the instant asset write-off rules
    • 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.

    Under the measures, different rules apply depending on whether or not an entity is 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 over the instant asset threshold which are eligible for the accelerated depreciation are added to the general small business pool. You can 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 as part of the general small business pool rules.

    See also:

    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 a qualifying asset. This includes assets that have not been immediately deducted under the instant asset write-off rules.

    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 after first offsetting a decline in value of 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
    • $1,000 or more 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 annual 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 use in their business.

    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 annual 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 use in the business.

    Under past tax arrangements, J Construction Solutions Pty Ltd could claim 30% depreciation in the first year (based on the asset’s effective life of 6 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

    See also:

    Last modified: 24 Mar 2020QC 61924