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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The government announced that it would make changes to small business concessions. At the time of printing these changes had not become law.
Go to ato.gov.au/newlegislation for more information about the progress of this legislation.
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 $6,500 each can be written off immediately
- other depreciating assets are pooled in a general small business pool and deducted at the rate of 30%
- newly acquired assets are deducted at 15% (half the pool rate) in the first year, regardless of when they were acquired during the year.
- the threshold at which a small business can write-off the total balance of the general small business pool is aligned with the instant write-off threshold of $6,500.
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.
There are also special rules for motor vehicles, see Special motor vehicle depreciation rules.
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 simplified 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 UCA rules.
Special motor vehicle depreciation rules
For eligible motor vehicles acquired in 2013–14 and subsequent income years, small business entities are able to claim an accelerated initial deduction.
If an eligible motor vehicle is acquired, you can choose to claim an immediate deduction up to $5,000 in the year you start to use the motor vehicle, or have it installed ready for use, for a taxable purpose. The remainder of the purchase cost is then depreciated as part of the general small business pool at 15% in the first year and 30% in later years.
An eligible motor vehicle is generally any motor powered road vehicle (including four wheel drive vehicles). However it does not include road vehicles that are not used on public roads, or only travel on public roads as a secondary function to their main use. An eligible motor vehicle can be purchased new or second-hand.
Examples of eligible motor vehicles include:
Examples of motor vehicles that are not eligible include:
- road rollers
- combine harvesters
- earthmoving equipment
Example: The main function of a motor vehicle is related to public use
Adam and John own a civil engineering business that is a small business entity. They purchase a truck and a mini excavator. The truck is a road vehicle and its main function is to transport soil to and from work sites. The mini excavator is used to dig and move soil around work sites. Occasionally the mini excavator travels small distances on public roads between work sites, however this is secondary to its main purpose. In these circumstances, the truck is a motor vehicle that can be written off under the special small business motor vehicle depreciation rules, but the mini excavator is not.
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Small businesses cannot use these rules if they are entitled to write off the cost of a motor vehicle immediately using the instant asset write-off rules because the vehicle cost less than $6,500, see Simplified depreciation rules.
Motor vehicles that are not subject to instant asset write-off rules are allocated to the general small business pool in the start year. Once in the pool, the deduction available in the start year will depend on the amount of the taxable purpose proportion of the adjustable value of the motor vehicle.
However, if in the start year, a motor vehicle is added to the general small business pool that has a low value (that is, the deduction that can be claimed for the pool is less than $6,500, but more than zero), then the deduction is claimed under the general small business pool rules rather than the special motor vehicle depreciation rules. See Simplified depreciation rules.
Example: the amount of the deduction for the general small business pool is less than $6,500 in the start year
Hans' Florist is a small business entity that buys a $7,000 second hand van in the 2013–14 income year for flower deliveries. The van is only used for business purposes. In the same year, Hans' Florist sells a large display refrigerator for $1,700. The opening pool balance for the year was $1,000. Hans' Florist works out the deduction for the general small business pool as follows:
$1,000 + $7,000 = $8,000 - $1,700 = $6,300
Hans' Florist can claim a deduction for the general small business pool of $6,300, writing off the entire value of the pool. The deductions for the motor vehicle are included in the $6,300 deduction for the general small business pool and no further deductions are available for the van.
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Assets for which deductions are claimed under the UCA
For some 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*
- 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.
* 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.
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
Under the UCA, you can choose to allocate to a software development pool expenditure you incur in developing (or having another entity develop) 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.
- have not previously allocated such expenditure to a software development pool and you choose not to do so this year, or
- incur the expenditure in developing in-house software that you do not intend using solely for a taxable purpose,
then 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 four years (if you started to hold the in-house software under a contract entered into after 7.30 PM AEST on 13 May 2008 or otherwise started to hold it after that day) 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 $6,500 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: 02 Apr 2015QC 39786