Small business entities
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
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From the 2007-08 income year the simplified tax system provisions have been replaced with new streamlined provisions for small business entities. The concessions that were available under the simplified tax system have, in effect, carried over to the new rules. This means that you can gain access to the concessions that were previously available to you as a simplified tax system taxpayer if you meet the new small business eligibility criteria.
You are eligible to be a small business entity for an income year if:
- you carry on a business in that year, and
- you have an aggregated turnover of less than $2 million.
Similarly to the previous grouping rules that existed under the former simplified tax system, the new aggregation rules use the concepts of 'connected with' (which is based on control) and 'affiliates' to determine whether the turnover of any related businesses need to be included in the aggregated turnover of your business.
It is not necessary to specifically elect to be an eligible small business each year in order to access the concessions. However, you must assess your eligibility for the concessions each year.
Simplified depreciation rules
If you are an eligible small business you may choose to calculate deductions for your depreciating assets using these rules.
In general, the taxable purpose proportions of the adjustable values and second element of cost amounts of most:
- depreciating assets costing less than $1,000 each can be written off immediately
- other depreciating assets with an effective life of less than 25 years are pooled in a general small business pool and deducted at the rate of 30%
- depreciating assets with an effective life of 25 years or more are pooled in a long-life small business pool and deducted at the rate of 5%
- newly acquired assets are deducted at either 15% or 2.5% (half the relevant pool rate) in the first year, regardless of when they were acquired during the year.
The taxable purpose proportion is your reasonable estimate of the proportion you will use, or have installed ready for use, a particular depreciating asset for a taxable purpose.
If a small business entity chooses to stop using the simplified depreciation concession, it cannot again choose to use that concession until at least five years after the income year in which it chose to stop using that concession.
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If you are eligible, and choose to continue to use the depreciation rules, you will continue to include any new depreciating assets in the relevant pool. If you choose not to use the simplified depreciation rules you cannot add any new assets to those pools. You can alternatively account for those assets under the rules.
Assets for which deductions are claimed under the UCA
For certain depreciating assets, deductions must be claimed under the UCA rather than under the simplified depreciation rules:
- assets that are leased out, or are expected to be leased out, for more than 50% of the time on a depreciating asset lease - this does not apply to depreciating assets subject to hire purchase agreements, or short-term hire agreements on an intermittent hourly, daily, weekly or monthly basis where there is no substantial continuity of hiring. Depreciating assets used in rental properties are generally excluded from the simplified depreciation rules on the basis that they are subject to a depreciating asset lease
- assets allocated to a low-value or a common-rate pool before you started to use the simplified depreciation rules - those assets must remain in the pool and deductions must be claimed under the UCA
- horticultural plants, and
- in-house software where the development expenditure is allocated to a software development pool - see Software development pools.
Capital expenditure deductible under the UCA
As the simplified depreciation rules apply only to depreciating assets, certain capital expenditure incurred by a small business entity that does not form part of the cost of a depreciating asset may be deducted under the UCA rules for deducting capital expenditure.
This includes capital expenditure on certain business related costs and amounts directly connected with a project - see Capital expenditure deductible under the UCA for more information.
Under the UCA, you can choose to allocate to a software development pool expenditure you incur in developing (or in having developed) in-house software you intend to use solely for a taxable purpose. Once you allocate expenditure on such software to a pool, you must allocate all such expenditure incurred thereafter (in that year or in a later year) to a pool - see Software development pools.
If you have allocated such expenditure to a software development pool either before or since using the simplified depreciation rules, you must continue to allocate such expenditure to a software development pool and calculate your deductions under the UCA.
- you have not previously allocated such expenditure to a software development pool and you choose not to do so this year, or
- you incur the expenditure in developing in-house software that you do not intend using solely for a taxable purpose,
you can capitalise it into the cost of the unit of software developed and claim deductions for the unit of in-house software under the simplified depreciation rules when you start to use it (or install it ready for use) for a taxable purpose. Its decline in value can then be worked out using an effective life of two and a half years (or four years for expenditure made on or after 7.30pm AEST on 13 May 2008) and the prime cost method.
Deductions for in-house software acquired off the shelf by a small business entity for use in their business are available under the simplified depreciation rules. For example, such an item costing less than $1,000 will qualify for an outright deduction.
A small business entity can choose to claim deductions under either the simplified depreciation rules or the UCA for certain depreciating assets used in the course of carrying on a business of primary production. The choice is available for water facilities and for depreciating assets relating to landcare operations, electricity connections and phone lines.
You can choose to claim your deductions under the simplified depreciation rules or the UCA for each depreciating asset. Once you have made the choice, it cannot be changed.
Last modified: 26 Sep 2011QC 27969