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  • Depreciation expenses

    Attention

    Warning:

    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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    Small business entities

    Other businesses

    Continuing small business pools

    If you are not carrying on a business this year, but in a prior year you allocated assets to a general small business pool or long-life small business pool (or the law allocated the assets to such a pool), do not include the pool deductions at this section. Show such deductions at Other deductions on your tax return.

    Small business entities

    Include amounts for depreciation deductions claimed under the small business entity capital allowances (depreciation) rules and for the business use of other assets under the uniform capital allowances (UCA) rules. This includes your deduction under the small business entity rules for depreciating assets used for work-related or self-education purposes. However, this excludes any amount included at Personal services income.

    Small business entities can claim an immediate deduction for most depreciating assets costing less than $20,000 (excluding input tax credit entitlements) and can pool most of their other depreciating assets in a general small business pool.

    Some depreciating assets are excluded from these simplified depreciation rules, but a deduction may be available under the UCA rules.

    If you are a small business entity and are choosing to use these simplified depreciation rules, you must use immediate write-off and pooling as applicable. You cannot choose to use one and not the other.

    Five-year restriction

    Small business entities that have previously elected out of the simplified depreciation rules are no longer subject to the ‘lock-out’ rule (which prevented small businesses from re-entering the simplified depreciation regime for five years if they had opted out). These entities may re-elect to use the simplified depreciation rules.

    The $20,000 threshold and suspension of the five-year restriction only apply from 7.30pm AEST 12 May 2015 to 30 June 2018.

    See Simplified depreciation – rules and calculations or phone 13 28 66.

    Calculating your depreciation deductions

    You can work out your depreciation and capital allowance claims by using the Depreciation and capital allowances tool. If you want to manually calculate your amounts read on.

    If your accounting system or financial statements provide you with the amounts to complete worksheet 2, enter these amounts in the worksheet. Otherwise, use calculations 1 to 5 below to calculate your depreciation deductions.

    The amounts you enter in worksheet 2 must be tax values and not accounting values.

    Calculation 1: Deduction for certain assets (costing less than $20,000)

    An immediate deduction is available for certain depreciating assets:

    • which you started to use, or have installed ready for use during the income year
    • whose cost at the end of the year is less than $20,000 (excluding input tax credit entitlements)
    • that qualify for a deduction under the small business entity depreciation rules.

    Work out the taxable purpose proportion of each of these types of assets. You calculate the deduction as follows:

    • multiply each asset's adjustable value by the taxable purpose proportion
    • add these results and enter the total at (a) in worksheet 2.

    The adjustable value of an asset, at the time it was first used (or installed ready for use) for a taxable purpose, will be its cost unless the asset was previously used (or installed ready for use) by the small business solely for private purposes. For example, for a vehicle bought on 1 December at a cost of $19,990 (excluding input tax credit entitlements) and used for producing assessable income from that date at an estimated 70% of the time, the immediate deduction would be $19,990 × 70% = $13,993.

    Do not include the following amounts in this calculation; allocate these assets to the general small business pool (see Calculation 2):

    • depreciating assets costing less than $20,000 which you held prior to using the simplified depreciation rules
    • depreciating assets that cost $20,000 or more. Such assets must be allocated to the general small business pool (see calculation 2) even if the taxable purpose proportion is less than $20,000. For example, if the vehicle above cost $20,200, the taxable purpose proportion is $14,140 ($20,200 × 70%). However, you cannot obtain an instant deduction and the vehicle must still be allocated to the general small business pool because its cost is not less than $20,000.

    Definitions

    Adjustable value of a depreciating asset is its cost (excluding input tax credit entitlements) less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

    Assessable balancing adjustment amount arises where the termination value of the depreciating asset is more than the adjustable value.

    Cost addition amounts include the cost of capital improvements to assets and costs reasonably attributable to disposing of or permanently ceasing to use an asset (this may include advertising and commission costs or the costs of demolishing the asset).

    Decline in value (previously ‘depreciation’) is the value that an asset loses over its effective life.

    Deductible balancing adjustment amount arises where the termination value of the depreciating asset is less than the adjustable value.

    Depreciating asset is an asset with a limited effective life which declines in value over that life.

    Taxable purpose includes the purpose of producing assessable income.

    Taxable purpose proportion is the extent to which you use the asset for a taxable purpose, such as for the purpose of producing assessable income.

    Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset. Exclude the GST component where the amount received is for a taxable supply.

    Calculation 2: General small business pool deduction

    To calculate your deductions for the general small business pool you must first calculate the opening pool balance of the pool.

    If 2017–18 was the first income year for which you were a small business entity and chose to apply the simplified depreciation rules, the opening balance of the general small business pool is the sum of the taxable purpose proportions of the adjustable values of the depreciating assets that were:

    • used, or held for use, just before the start of 2017–18
    • not excluded from the simplified depreciation rules.

    Include only the taxable purpose proportion of the adjustable value of each depreciating asset. For example:

    • for an asset with an adjustable value of $50,000 which is used only 50% for an income-producing purpose, add only $25,000 to the pool
    • for an asset with an adjustable value of $20,200 which is used 70% for an income-producing purpose, add only $14,140 to the pool.

    You can choose not to allocate an asset to your general small business pool if you first used it, or installed it ready for use, for a taxable purpose before 1 July 2001.

    For an income year that is not the first income year for which you were a small business entity, the opening pool balance of the general small business pool is the closing pool balance for the previous income year, except where you make an adjustment to reflect the changed business use of a pooled asset.

    Calculate your deduction for the general small business pool in 2017–18 as follows:

    • opening pool balance $ × 30%
    • where necessary, make a reasonable apportionment for the general small business pool deduction between primary production and non-primary production activities
    • enter the result of your general small business pool deduction at (b) in worksheet 2
    • if the pool balance (after taking into account additions and disposals but before calculating the deductions in steps 2, 3 and 4) is below $20,000, you instead work out the deduction for the pool using calculation 5.

    Calculation 3: Depreciating assets including motor vehicles first used for a taxable purpose during 2017–18 and cost addition amounts for assets already allocated to a pool

    You calculate your deduction at half the general small business pool rate for:

    • depreciating assets that you first used or installed ready for use for a taxable purpose during the year
    • cost addition amounts for assets already allocated to the general small business pool.

    Calculate your deduction as follows:

    • the taxable purpose proportion of the adjustable value of each depreciating asset first used for a taxable purpose this year multiplied by 15%, plus
    • the taxable purpose proportion of the cost addition amounts multiplied by 15%.

    Enter the total deduction for general small business pool assets at (c) in worksheet 2.

    Calculation 4: Other depreciating assets

    Work out your deduction for the decline in value of all your other depreciating assets that are not included in calculations 1 to 3.

    For information on how to calculate the decline in value of these assets, see Guide to depreciating assets.

    Enter your total deduction for other depreciating assets at (e) in worksheet 2.

    Do not include at (e) in the worksheet depreciating assets which qualify for a deduction under Subdivision 40-F or 40-G of the ITAA 1997 as water facilities, fencing assets, fodder storage assets or landcare operations in your primary production business and for which you have chosen to claim a deduction under those Subdivisions and not these small business entity depreciation rules. Enter these deductions at Landcare operations and business deduction for decline in value of water facility, fencing asset and fodder storage asset.

    Calculation 5: Disposal of depreciating assets

    (a) Certain assets (costing less than $20,000) and low-cost assets claimed in previous years.

    If you have disposed of a depreciating asset (costing less than $20,000) for which you have claimed an immediate deduction in calculation 1 this year or a low-cost asset for which you have claimed an immediate deduction in a prior year, include the taxable purpose proportion of the termination value in the Business reconciliation items section.

    For example, you acquired an asset on 1 February 2013 for $6,400 for 100% taxable use and claimed an immediate write-off under the threshold which existed at that time. You disposed of this asset at arm's length on 1 February 2018 for $3,000. Include $3,000 as income at the Business reconciliation items section.

    (b) Assets allocated to the general small business pool.

    Where you dispose of depreciating assets that have been allocated to the general small business pool, you deduct the taxable purpose proportion of the termination value from the closing pool balance. For example, for a pooled depreciating asset which used only 50% for an income-producing purpose, and was sold for $3,000 (excluding GST), only $1,500 will be deducted from the closing pool balance. If the balance of a pool is below $20,000 but greater than zero (after taking into account any additions and disposals but before calculating the deductions in calculations 2, 3 and 4) you claim an immediate deduction for this amount. Enter this deduction against general small business pool assets at row b in worksheet 2.

    If the closing pool balance is less than zero, you include the amount below zero in your assessable income in the Business reconciliation items section.

    If expenses are incurred in disposing of a depreciating asset, these expenses may be taken into account in calculation 3.

    (c) Other depreciating assets.

    For information on how to calculate any balancing adjustment amounts on the disposal of other depreciating assets, see Guide to depreciating assets.

    Balancing adjustment amounts are included in the Business reconciliation items section. See What are income reconciliation adjustments? and What are expense reconciliation adjustments?

    Closing pool balance

    The closing balance of each small business pool for an income year is:

    • the opening pool balance (see calculation 2) plus
    • the taxable purpose proportion of the adjustable value of assets that were first used, or installed ready for use, for a taxable purpose during the year (see calculation 3) plus
    • the taxable purpose proportion of any cost addition amounts for assets in the pool during the year (see calculation 3) less
    • the taxable purpose proportion of the termination value of any pooled assets disposed of during the year (see calculation 5) less
    • the general small business pool deduction (see calculation 2) less
    • the deduction for assets first used by you during the year (see calculation 3) less
    • the deduction for any cost addition amounts for pooled assets during the year (see calculation 3).

    If your closing pool balance is less than zero, see calculation 5.

    The closing pool balance for this year becomes the opening pool balance for 2018–19 except where you made an adjustment to reflect the changed business use of a pooled asset.

    You will need your opening pool balance to work out the pool deduction next year. Do not enter your closing pool balance on your tax return.

    Worksheet 2: Depreciation deductions for small business entities

    Row

    Calculation elements

    Primary production
    ($)

    Non-primary production
    ($)

    Total
    ($)

    a

    Certain assets

     


     


     


    b

    General small business pool

     


     


     


    c

    General small business pool (half rate)

     


     


     


    d

    Other assets

     


     


     


    e

    Depreciation expenses:
    add the amounts at rows a, b, c and d.

     


     


     


    Do not include any amount shown at Personal services income.

    1. Enter the amount at row e at Depreciation expenses.
    2. Enter the total amount at row a at Small business entity simplified depreciation - Deduction for certain assets.
    3. Add up the total amounts at rows b and c and enter the amount at Small business entity simplified depreciation - Deduction for general small business pool.
    Other businesses

    To calculate the decline in value of these assets you can use the Depreciation and capital allowances tool.

    Include amounts for the depreciation claimed in your books of account, except for those assets allocated in a prior year to a general pool or a long-life pool. For assets allocated to such a pool, include here the amount of the pool deduction to be claimed for tax purposes. For further information, see Definitions.

    The depreciation amount should not include profit or loss on the sale of depreciating assets. You should include profits on the sale of depreciating assets at Other business income. You should include losses on the sale of depreciating assets at All other expenses.

    Accounting or book depreciation may differ from the deduction for the decline in value of depreciating assets.

    You carry out the reconciliation between accounting depreciation and the deduction for decline in value at Expense reconciliation adjustments.

    See also Guide to depreciating assets.

    Is expenditure revenue or capital in nature?

    Law Administration Practice Statement PS LA 2003/8 Practical approaches to low-cost business expenses provides guidance on two straightforward methods that can be used by taxpayers carrying on a business to help determine whether expenditure incurred to acquire certain low-cost items is to be treated as revenue expenditure or capital expenditure.

    Subject to certain qualifications, the two methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost items. The threshold rule allows an immediate deduction for qualifying low-cost business items costing $100 or less. The sampling rule allows taxpayers with a low-value pool to use statistical sampling to determine the proportion of the total purchases on qualifying low-cost business items that are revenue expenditure.

    We will accept a deduction for expenditure incurred on low-cost assets calculated in accordance with this practice statement.

      Last modified: 28 Jun 2018QC 55562