Show download pdf controls
  • More information

    Find out about:

    Business income

    Business income is divided into:

    See also:

    Do not show at this section

    Do not show the following types of income here:

    Assessable government industry payments

    Generally, government credits, grants, rebates, bounties and subsidies are assessable income of the recipient if they are received in, or in relation to, the carrying on of a business. This includes amounts of a capital nature. Amounts relating to the commencement or cessation of a business may give rise to a capital gain. However, in certain circumstances, a specific grant or payment is considered to be exempt income or non-assessable non-exempt income.

    A number of Commonwealth, State and Territory government grants and payments have been made available to businesses in response to recent natural disasters and COVID-19. Only those grants and payments that are assessable income will need to be included at this section.

    Don’t include at this section the following grants and payments:

    • Cash Flow Boost Payments (COVID-19) (non-assessable, non-exempt income). If cash flow boost payments have been included as income in the accounts, they can be included at both Other business income and an income subtraction reconciliation amount.
    • Commonwealth and State government grants and payments that are tax free.

    Examples of assessable government industry assistance are:

    • bounties
    • employee subsidies
    • export incentive grants
    • fuel tax credits
    • industry restructuring and adjustment payments
    • JobMaker hiring credits – see below for JobMaker hiring credit reporting
    • JobKeeper payments (COVID-19) – see below for JobKeeper reporting
    • Supporting Apprentices and Trainees wage subsidy (COVID-19)
    • producer rebate (wine equalisation tax)
    • alcohol manufacturer refund
    • product stewardship (oil) benefit.
    JobKeeper reporting

    The accounting basis you use determines the way you report JobKeeper payments.

    Accruals accounting basis

    JobKeeper payments are derived when the entity provides a completed and valid Business monthly declaration to the ATO.

    • JobKeeper payments relating to valid business monthly declarations made on or before 30 June 2020 are included in your 2019–20 tax return
    • JobKeeper payments relating to valid business monthly declarations made on or after 1 July 2020 are included in your 2020–21 income tax return.

    Cash accounting basis

    JobKeeper payments are derived when the entity receives those payments.

    • JobKeeper payments you received on or before 30 June 2020 are included in your 2019–20 income tax return
    • JobKeeper payments you received on or after 1 July 2020 are included in your 2020–21 income tax return.
    JobMaker hiring credit reporting

    The accounting basis you use determines the way you report JobMaker hiring credit payments.

    Accruals accounting basis

    JobMaker hiring credit payments are derived when the entity provides the ATO with a valid claim form after each JobMaker period.

    • JobMaker hiring credit payments relating to valid claim forms made on or before 30 June 2021 are included in your 2020–21 tax return
    • JobMaker hiring credit payments relating to valid claim forms made on or after 1 July 2021 are included in your 2021–22 income tax return

    Cash accounting basis

    JobMaker hiring credit payments are derived when the entity receives those payments. Payments received on or before 30 June 2021 are included in your 2020–21 tax return.

    See also:

    Do not include Medicare payments received by medical practices here. Include them at Other business income.

    If you are a primary producer, you must include the amounts shown at PP11 on your primary production worksheet.

    Other business income

    Other business income includes:

    • gross sales of trading stock
    • gross sales from produce
    • goods taken from stock for your own use
    • value of livestock killed for rations
    • value of livestock exchanged for other goods or services
    • gross earnings from services
    • rent derived from carrying on a business of renting property
    • income earned through the sharing economy, or other marketplace, where you're carrying on a business
    • taxi driver and ride-sourcing earnings (income you earned as a non-employee taxi driver if it is not shown at Personal services income)
    • amounts received as recoupment of expenses
    • bad debts recovered
    • profit on sale of depreciating assets
    • royalties
    • insurance recoveries
    • subsidies
    • employee contributions for fringe benefits
    • assessable non-government assistance from all sources
    • foreign exchange (forex) gains
    • payments and grants reported in a Taxable payments annual report where tax has not been withheld and they relate to business income
    • business-related income statements or payment summaries where no tax has been withheld.

    Your other business income excludes amounts shown at Business income statement and payment summaries and at the Assessable government industry payments field.

    If you are a primary producer, you must add the amounts shown at PP1, PP2, PP6, PP7 and PP10 on your primary production worksheet to any other income from a business of primary production referred to above.

    Business transactions

    Organisations that process transactions for their business clients through an electronic payment system are now required to report these to us.

    The information is reported to us in a Business transactions through payment systems report.

    These business transactions may need to be taken into consideration when completing your tax return.

    If the business transactions belong to a related entity, or belong to another non-related entity, see What if you don’t agree with the pre-filled information?

    Goods and services tax (GST)

    If you are registered or required to be registered for GST, the following apply:

    • Consider your assessable income, exempt income and amounts received or receivable. For tax purposes, you should exclude GST from them when you calculate your income and deductions.
    • Reduce deductible losses and outgoings by the amount of input tax credit entitlement. In certain circumstances, you could make an adjustment for GST purposes. This could alter your assessable income or deductibles. For example, a change in how much you use an asset for business purposes could increase or decrease your GST component.
    • Exclude GST under rules such as capital gains tax and capital allowances.

    If you are not registered for GST or required to be, you do not need to adjust your income and deductions for GST. You can claim the GST-inclusive amount incurred on deductible outgoings.

    Business expenses

    You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.

    There are three golden rules for what we accept as a valid business deduction:

    • The expense must have been for your business, not for private use.
    • If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
    • You must have records to prove it.

    See also:

    Business expenses are divided into:

    See also:

    Do not show at this section

    Do not include the following expenses on your schedule:

    Your expenses may include expenditure relating to the acquisition and disposal of cryptocurrency in the ordinary course of your business, or the arm’s length value of the business item (including trading stock) acquired using cryptocurrency.

    You need to complete all sections that relate to your business or businesses.

    You can't deduct salary and wage expenses where you have not complied with your pay as you go withholding obligations. See Removing tax deductibility of non-compliant payments.

    If you are a primary producer, you will need a primary production worksheet to help you work out some of the amounts. Complete the worksheet before proceeding.

    Opening stock

    The opening value of an item of stock must equal its closing value in the previous year. The total value of all stock on hand at the start of the year is equal to the amount shown as closing stock on your 2020 tax return.

    If you are a primary producer, you must add the value of your opening stock from your livestock account at PP4 on your primary production worksheet to the value of your opening stock from your produce account at PP9. The total of these amounts is the total value of your primary production opening stock.

    Do not include any amounts representing opening stock of a business which commenced operations during the year. Include the purchase costs of these items at Purchases and other costs.

    Return to Business expenses.

    Purchases and other costs

    Purchases and other costs represent the direct cost of materials used for manufacture, sale or exchange in deriving the gross proceeds or earnings of the business. It includes inwards freight and the cost of stock acquired when starting or acquiring a business during the year. It may also include some costs for labour and services provided under contract, if these are recorded in the cost of sales account in your business books of account. If so, do not include this amount at Contractor, subcontractor and commission expenses.

    If you are a primary producer, you must include the value of your purchases from your livestock account at PP5 on your primary production worksheet.

    Former STS taxpayers

    If you are eligible and are continuing to use the STS accounting method, include only purchases and other costs that you have paid.

    Return to Business expenses.

    Closing stock

    Small business entities

    If you are a small business entity and are choosing to use the simplified trading stock rules you need to account for changes in the value of your trading stock only if there is a difference of more than $5,000 between the value of all your stock on hand at the start of the income year and a reasonable estimate of the value of all your stock on hand at the end of the income year.

    The value of your stock on hand at the start of the income year is the same value as the closing value shown on your schedule in the previous year. This may not necessarily reflect the actual value of your stock if you did not account for the change in value of your stock in the previous year. For more information on a reasonable estimate of the value of stock, see estimating stock value or phone 13 28 66.

    You can still choose to conduct a stocktake and account for changes in the value of trading stock, if you wish.

    Is the difference between the value of your opening stock and a reasonable estimate of your closing stock more than $5,000?

    Yes – You must account for changes in the value of your trading stock. Go to Step 2.

    No – If you choose not to account for changes in the value of your trading stock, go to Step 1. Otherwise, go to Step 2.

    1. If the difference referred to above is $5,000 or less and you choose not to account for this difference, the closing stock values you enter must be the same as the values you enter at Opening stock. Do not enter your reasonable estimate.

      Go to Cost of sales.
    2. If the difference referred to above is more than $5,000 or you choose to account for the difference in trading stock, the Closing stock values must be brought to account under section 70-35 of the ITAA 1997. For more information, see Other businesses below.

      You must include in your Closing stock amount the value of all stock on hand, regardless of whether you have paid for the stock.
    Other businesses

    The amount you show at Closing stock is the total of the value of all items of trading stock, with the value of each item calculated for tax purposes in accordance with section 70-45 of the ITAA 1997.

    Trading stock is anything you have on hand which you produced, manufactured, acquired or purchased for the purpose of sale, manufacture or exchange. For example, trading stock includes livestock but not working animals (except those used by a primary producer), crops and timber when harvested, and wool after it is removed from the sheep.

    Manufacturers must include as trading stock partly manufactured goods and materials on hand. However, closing stock excludes any amount that represented closing stock of a business that ceased operations during the year. This amount is included at Other business income. For more details about what constitutes trading stock, see Simplified trading stock rules or phone 13 28 66.

    You can choose one of the following three methods to value your trading stock:

    • cost
    • market selling price
    • replacement value.

    You may elect to value an item of trading stock below the lowest value calculated by any of these methods. This may be because it has become obsolete or there are other special circumstances. The value you elect must be reasonable. Where you elect to value an item of trading stock below cost, market selling value and replacement value, you must complete the Trading stock election.

    You may use different methods to calculate each item of trading stock in different years or for different items in the same year. However, the opening value of each item in a particular year must be the same as the closing value for that item in the previous year.

    If you are registered for GST, the value of closing stock should not include an amount equal to the input tax credit that would arise if you had acquired the item solely for business purposes at the end of the income year. Input tax credits do not arise for some items of trading stock, such as shares.

    If you are a primary producer, you must add the value of your closing stock from your livestock account at PP3 on your primary production worksheet to the value of your closing stock from your produce account at PP8 on your primary production worksheet.

    The total of these amounts is the total value of your primary production closing stock.

    As the tax values of closing stock on hand are shown at PP3 and at PP8 on your primary production worksheet, you can't reduce these values by accounting entries. Keep records showing how each item was valued.

    Return to Business expenses.

    Cost of sales

    MyTax will work out your Cost of sales from the information you provide.

    Return to Business expenses.

    Foreign resident withholding expenses (excluding capital gains)

    Enter your total non-primary production expenses directly related to income subject to foreign resident withholding (excluding capital gains). You will not have any primary production amounts here.

    Return to Business expenses.

    Contractor, sub-contractor and commission expenses

    These are expenses for labour and services provided under contract, other than salaries or wages, for example:

    • payments to self-employed people, such as consultants and contractors, including payments subject to a PAYG voluntary agreement to withhold, and payments made under a labour-hire arrangement
    • commissions paid to people not receiving a retainer
    • agency fees (such as for services provided by an advertising agency)
    • service fees (such as plant service)
    • management fees
    • consultant fees.

    Do not include the following at this field:

    Return to Business expenses.

    Superannuation expenses

    If you made superannuation contributions on behalf of eligible employees or their dependants as a business expense, enter the superannuation expenses for the income year. Do not include any amount that was a contribution for you. The deduction for your own superannuation contributions must be claimed at Personal super contributions.

    Employers are entitled to a deduction for the contributions they made to a complying superannuation, provident, benefit or retirement fund or retirement savings account (RSA) where the contributions are to provide superannuation benefits for employees or to provide benefits to the employee’s dependants on the employee’s death. A deduction is allowable in the income year in which the contributions are made.

    Contributions made to a non-complying fund:

    • are not allowable as a deduction, and
    • do not count towards superannuation guarantee obligations.

    You can check the compliance status of superannuation funds at superfundlookup.gov.auExternal Link. Under the superannuation guarantee, an employer needs to provide a minimum level of superannuation for employees. If the employer does not make the minimum contribution by the relevant date, the employer is required to pay the superannuation guarantee charge on the superannuation guarantee shortfall. The superannuation guarantee charge is not a superannuation contribution and is not tax deductible. Contributions made by employers to offset a superannuation guarantee charge liability are not deductible.

    Contributions paid by an employer to a non-complying superannuation fund on behalf of an employee are fringe benefits (other than where the contributions are made for a temporary resident) and may be subject to tax under the Fringe Benefits Tax Assessment Act 1986.

    There is no age-related limit on deductions for contributions made on or before the 28th day following the end of the month in which the employee turns 75. However, the employee may be liable to pay additional tax if their concessional contributions exceed their concessional contributions cap.

    See also:

    For contributions made after the 28th day following the end of the month of the employee’s 75th birthday, the deduction claimable is limited to:

    • the amount of the contribution required under an industrial award, determination or notional agreement preserving state awards, or
    • the amount of the contribution that reduces an employer's charge percentage under the Superannuation Guarantee (Administration) Act 1992 in respect of the employee, or
    • where both amounts are applicable, the greater of the two amounts is to be applied.

    Return to Business expenses.

    Bad debts

    You are not allowed a deduction for bad debts unless you have previously included the amount in your assessable income and it relates to money you lent in the ordinary course of a money-lending business or it represents a business loss or outgoing of a revenue nature.

    Before you can claim a bad debt, it must be bad and not merely doubtful. The question of whether a debt is a bad debt will depend on the facts in each case and, where applicable, the action taken for recovery.

    Do not include accounting provisions for doubtful debts. You include them at All other expenses, then add them back at Expense reconciliation adjustments in the Business reconciliation items section.

    See also:

    You can also claim a deduction for:

    • partial debt write-offs; where only part of a debt is bad and is written off, you may claim a deduction for the amount written off
    • losses incurred for debt written off under a debt-for-equity swap where you discharge, release or otherwise extinguish the whole or part of a debt owed to you in return for equity in the debtor.

    In the case of a debt-for-equity swap, you can claim a deduction for the difference between the amount of the debt and the greater of the market value of the equity at the time of issue or the value of the equity recorded in your books at the time of issue.

    See also:

    Records you need to keep

    Keep a statement for all debtors whose bad debts you wrote off during the year, showing:

    • their name and address
    • the amount of the debt
    • the reason you regarded the debt as bad
    • where applicable, the year that you returned the amount as income.

    Return to Business expenses.

    Lease expenses

    This is expenditure incurred on financial leases and on operating leases for assets such as motor vehicles and plant. Do not include the cost of leasing real estate (show this cost at Rent expenses).

    If you include capital expenditure incurred to terminate a lease or licence you will need to add back the amount at Expense reconciliation adjustments. Although capital expenditure to terminate a lease or licence is not deductible in one year, a five-year straight-line write-off may be allowable (see section 25–110 of the ITAA 1997) for certain capital expenditure incurred to terminate a lease or licence if the expenditure is incurred in the course of carrying on a business, or in connection with ceasing to carry on a business. See note 3.

    In some circumstances, lease expenses may be debt deductions for the purposes of the thin capitalisation rules.

    If you include an amount of lease expense which is not allowable as a deduction, such as amounts disallowed under the thin capitalisation rules, you will need to add back the amount at Expense reconciliation adjustments.

    Expenses incurred under a hire purchase agreement are not lease expenses. Such expenses are included at Expense reconciliation adjustments.

    Special rules apply to leased cars if the cost of the car exceeds the car limit that applies for the financial year in which the lease commences. The car limit for 2020–21 is $59,136.

    If you lease a car that is subject to the special rules, the reconciliation between the lease expense and the tax treatment is carried out at Expense reconciliation adjustments. For more information, see Luxury car leasing.

    Records you need to keep

    List the assets leased and keep full details of the leasing expenses for each item, including motor vehicles and details of any private use. Leasing expenses of certain cars fall under the substantiation rules.

    Return to Business expenses.

    Rent expenses

    This is expenditure you incurred as a tenant for rental of land and buildings used in the production of income. Include the cost of leasing real estate.

    Return to Business expenses.

    Interest expenses within Australia

    Include interest you incurred on money borrowed within Australia to acquire income-producing assets used in your business, to finance business operations or to meet current business expenses.

    Do not include interest incurred in deriving rental income. Claim this at Rent on your tax return.

    If you include an amount of interest which is not allowable as a deduction, such as amounts denied by the thin capitalisation rules, you will need to add back the amount at Expense reconciliation adjustments.

    Return to Business expenses.

    Interest expenses overseas

    Include any interest incurred on money borrowed from overseas sources to acquire income-producing assets used in your business:

    • to finance business operations, or
    • to meet current business expenses.

    Do not include interest incurred in deriving rental income. Claim this at Rent on your tax return.

    Generally, you are required to withhold an amount of withholding tax:

    • from interest paid or payable to non-residents, and
    • from interest derived by a resident through an overseas branch.

    You must send these withheld amounts to us. You can't deduct an interest expense if you were required to withhold tax on that interest and you failed to do so.

    For information on the tax treatment of interest paid to non-residents, phone 13 28 66.

    If you include an amount of interest which is not allowable as a deduction, such as amounts denied by the thin capitalisation rules, you will need to add back the amount at Expense reconciliation adjustments.

    Return to Business expenses.

    Depreciation expenses

    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.

    Small business entities

    Include amounts for depreciation deductions claimed under the small business entity simplified 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 businesses using the simplified depreciation rules have access to temporary full expensing. You cannot opt out of temporary full expensing for assets that the simplified depreciation rules apply to. For eligible assets purchased and first used, or installed ready for use, from 7.30pm (AEDT) on 6 October 2020 until 30 June 2022, you must immediately deduct its taxable purpose portion of any value in the respective income year. These assets are not added to your small business pool.

    Under temporary full expensing you must also claim a deduction for the cost of improvements made from 7.30pm (AEDT) on 6 October 2020 to 30 June 2022 to an asset that you have written off under the simplified depreciation rules (including instant asset write-off) in an earlier income year, provided you have not previously claimed improvement costs to the asset. You must claim an immediate deduction for the taxable purpose portion of the improvement cost and no threshold applies.

    If temporary full expensing does not apply for an asset, where applicable, you must claim an immediate deduction under instant asset write-off for assets you first start to use, or have installed ready for use, for a business purpose from 12 March 2020 to 30 June 2021, if they cost less than $150,000 each. However, you must have purchased the asset between 7.30pm (AEST) on 12 May 2015 and 31 December 2020.

    Assets purchased that cost the relevant threshold amount or more are deducted over time using a small business pool. Some of these assets may have an accelerated rate of depreciation when they are added to the pool under the backing business investment – accelerated depreciation rules.

    For income years ending between 7.30pm AEDT on 6 October 2020 and 30 June 2022, you deduct the entire balance of the small business pool (there is no threshold for that period).

    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 suspension of the five-year restriction only applies from 12 May 2015 to the end of an income year that includes 30 June 2022. For small businesses that have not adopted a substituted accounting period, the effect of the amendments is that the temporary suspension of the lock-out rule is extended to 30 June 2022.

    See Simplified depreciation for small business or phone 13 28 66.

    Calculating your depreciation deductions (Small business entities using simplified depreciation)

    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 1, enter these amounts in the worksheet. Otherwise, use calculations 1 to 4 below to calculate your depreciation deductions.

    The amounts you enter in worksheet 1 must be tax values and not accounting values.

    Calculation 1: Deduction for certain assets (costing less than the relevant instant asset write off threshold or using temporary full expensing)

    For each depreciating asset purchased from 7.30pm (AEST) on 12 May 2015 to before 7.30pm (AEDT) on 6 October 2020 and first used or installed ready for use for a taxable purpose such as for producing assessable income in 2020–21, you deduct the taxable business proportion of eligible depreciating assets costing less than $150,000 each (excluding input tax credit entitlements) under instant asset write-off.

    For assets you start to hold, and first use (or have installed ready for use) for a taxable purpose at any time between 7.30pm (AEDT) 6 October 2020 and 30 June 2022, the instant asset write-off threshold does not apply. You must immediately deduct the business portion of the asset's cost under temporary full expensing.

    Under temporary full expensing, you must also claim a deduction for the cost of improvements made from 7.30pm (AEDT) on 6 October 2020 to 30 June 2022 to an asset that you have written off under the simplified depreciation rules (including instant asset write-off) in an earlier income year, provided you have not previously claimed improvement costs to the asset. You must claim an immediate deduction at this step for the business portion of the improvement cost and no threshold applies. Any later improvements are added to the small business pool.

    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 1.

    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 truck bought on 1 October 2020 at a cost of $149,990 (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 $149,990 × 70% = $104,993.

    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 the relevant instant asset write off threshold which you held prior to using the simplified depreciation rules
    • depreciating assets where the cost is not less than the relevant instant asset write off threshold. Such assets must be allocated to the general small business pool (see calculation 2) even if the taxable purpose proportion is less than the threshold. For example, if the truck above cost $150,200 (excluding input tax credit entitlements), the taxable purpose proportion is $105,140 ($150,200 × 70%). On 1 October 2020 the instant asset threshold was $150,000. However, you cannot obtain an instant deduction and the truck must still be allocated to the general small business pool because its cost is not less than the relevant threshold at the time it was first used.
    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 balance

    Calculation 2a – calculate your opening pool balance

    If 2020–21 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 2020–21
    • not excluded from the simplified depreciation rules.

    When allocating each depreciating asset that you hold at the start of the income year to the general small business pool only include the taxable purpose proportion of the adjustable value of each depreciating asset. For example, for an asset with an adjustable value of $50,000 at the start of 2020–21 which is used only 60% for an income-producing purpose, add only $30,000 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.

    Calculation 2b – calculate your closing pool balance

    For small businesses previously using the simplified depreciation rules, the opening balance of the general small business pool is the closing pool balance for the previous income year, adjusted to reflect any changed business use of a pooled asset.

    For small businesses which have not previously used the simplified depreciation rules, the opening pool balance is the sum of the taxable purpose proportions of the adjustable values of those depreciating assets that are used, or held for use, just before the start of 2020–21, and that are not excluded from the simplified depreciation rules.

    Calculate your pool balance at the end of the year as follows:

    • the opening pool balance (from calculation 2a), 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 (these are the assets that have not been written off in calculation 1), plus
    • the taxable purpose proportion of any cost addition amounts for assets in the pool during the year (these are the improvements to assets that have not been written off in calculation 1), less
    • the taxable purpose proportion of the termination value of any pooled assets disposed of during the year. If you dispose of depreciating assets that have been allocated to the general small business pool, the taxable purpose proportion of the termination value is deducted from the closing pool balance, for example, for a pooled depreciating asset used only 60% for an income-producing purpose which was sold for $3,000 (excluding GST) only $1,800 will be deducted from the closing pool balance.

    If the result above (the balance of the pool) is greater than zero for the 2020–21 income year, you claim an immediate deduction for this amount. Write the result at b in worksheet 1.

    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.

    The closing pool balance for this year becomes the opening pool balance for 2021–22, after any adjustments to reflect the changed business use of a pooled asset. Where you write off the entire pool balance your closing pool balance for 2020–21 will be zero.

    The closing pool balance is needed to work out the pool deduction for next year. Do not write the closing pool balance on the tax return.

    Calculation 3: 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 2.

    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 c in worksheet 1.

    Do not include at c 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 4: Disposal of depreciating assets

    Calculation 4a Certain assets (costing less than the relevant instant asset write off threshold) and low-cost assets claimed in previous years

    If you have disposed of a depreciating asset (costing less than the relevant instant asset write off threshold) 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 2018 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 2021 for $3,000 (excluding GST). Include $3,000 as income at the Business reconciliation items section.

    Calculation 4b 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?

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

    You claim an immediate deduction if the balance of the pool is less than $150,000 (being the relevant instant asset write-off threshold from 12 March 2020) and write this amount at b in worksheet 1.

    Worksheet 1 Depreciation deductions (small business entities using simplified depreciation only)

    Row

    Calculation elements

    Primary production
    ($)

    Non-primary production
    ($)

    Total
    ($)

    a

    Certain assets (costing less than the relevant instant asset write off threshold or using temporary full expensing)

     


     


     


    b

    General small business pool

     


     


     


    c

    Other depreciating assets

     


     


     


    d

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

     


     


     


    Do not include any amount shown at Personal services income.

    1. Enter the amount at row d 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 amount at row b and enter the amount at Small business entity simplified depreciation - Deduction for general small business pool.
    Other businesses (excluding small businesses using simplified depreciation)

    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 other than 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. 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?

    Practice Statement Law Administration 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.

    Motor vehicle expenses

    As a business owner, you can claim a tax deduction for expenses for motor vehicles – cars and certain other vehicles – used in running your business.

    Key points:

    • The way to calculate your claim depends on your business structure.
    • If you change your business structure, your entitlements and obligations may change.
    • You must apportion your expenses between business and private use.
    • You must keep records for five years to prove your expenses.

    See also:

    Include motor vehicle expenses related to ride-sourcing activities at this section.

    Do not include depreciation, finance leasing charges or interest paid. You should include these at:

    • Depreciation expenses
    • Lease expenses
    • Interest expenses within Australia, or
    • Interest expenses overseas.

    Return to Business expenses.

    Repairs and maintenance

    You can claim a tax deduction for expenses relating to repairs, maintenance or replacement of machinery, tools or premises you use to produce business income, provided the expenses are not capital expenses.

    Expenditure incurred in making alterations, additions or improvements is of a capital nature. Where items are newly acquired, including by way of a legacy or gift, the cost of repairs to defects present at the time of acquisition is generally of a capital nature.

    If you claim for repair or maintenance expenses to a property or asset, your deduction must take reasonable account of how the asset was used. For example, if the asset was used 45% in the business, 40% for private use and 15% to produce exempt income, a reasonable deduction would be 45% of the expenditure.

    For more information on deductions for repairs, maintenance and replacement, see:

    Any non-deductible expenditure included at this field, such as items of a capital nature or amounts relating to private use of an item, should also be included at Expenses reconciliation adjustments.

    To claim a deduction for capital expenses and depreciating assets, go to: Depreciation expenses

    Records you need to keep

    To support your claim for the cost of repairs, you must keep full details, including source documents of the nature and cost of repairs to each item.

    Return to Business expenses.

    All other expenses

    This is the total of all other expenses which you incurred in deriving your profit or loss and which you have not already shown elsewhere. Other expenses include:

    • workers' salaries and wages
    • accounting and professional fees
    • advertising
    • office supplies
    • foreign exchange (forex) losses, and
    • any loss on the sale of a depreciating asset as shown in your accounts.

    Include:

    Don't claim these amounts at Gifts or donations or Cost of managing tax affairs.

    For information about forex losses, go to ato.gov.au or see Other deductions.

    Include capital and other non-deductible items (including debt deductions denied by thin capitalisation rules) shown here at Expense reconciliation adjustments.

    See also:

    Return to Business expenses.

    Goods and services tax

    If you are registered or required to be registered for GST, exclude from the deductions any input tax credit entitlements that arise in relation to outgoings.

    If you pay GST by instalments, and incurred a penalty for underestimating a varied GST instalment, you can claim a deduction for the penalty at Cost of managing tax affairs on your tax return. Do not show the penalty in this section.

    Prepayments of $1,000 or more

    If you made a prepayment of $1,000 or more for something to be done (in whole or in part) after 30 June 2020, the timing of your deduction may be affected by the rules relating to prepayments. You will need to apportion your deduction for prepaid business expenditure over the service period, or 10 years, whichever is less. There is an exception if the 12-month rule applies and you are a small business entity or you would be a small business entity if the aggregated turnover threshold was less than $50 million.

    Expenses shown in this section may include prepaid expenses that differ from the amounts allowable as deductions in 2020–21. Where this occurs, make an expense reconciliation adjustment at Expense reconciliation adjustment in the Business reconciliation items section.

    See also:

    Thin capitalisation

    The thin capitalisation provisions apply to entities (including individuals) to reduce certain deductions (called ‘debt deductions’) for costs incurred in obtaining and servicing debt finance, where the debt applicable to Australian operations exceeds the limits set out in Division 820 of the ITAA 1997.

    A 'debt deduction' is, broadly, an expense incurred in obtaining or maintaining a loan or other form of debt finance. Examples include:

    • interest
    • establishment fees
    • legal costs for preparing loan documents
    • fees charged by lending institutions for drawing on a loan facility.

    The thin capitalisation rules may apply to you if:

    • you are an Australian resident and you, or any of your associate entities, are an Australian controller of a foreign entity or carry on business overseas at or through a permanent establishment, or
    • you are a foreign resident with operations or investments in Australia and you are claiming debt deductions.

    The thin capitalisation rules will not affect you if:

    • your debt deductions (combined with the debt deductions of your associate entities) do not exceed $2,000,000 in 2020–21, or
    • you are an Australian resident and the combined value of your associates’ and your Australian assets is not less than 90% of the value of your associates’ and your total assets.

    If the thin capitalisation rules affect you, the amount of any debt deductions you can claim may be reduced by these rules.

    See also:

    Business reconciliation items

    Consider the following items to see whether you qualify for a deduction.

    Any adjustments to your income and expense amounts are dealt with at Income and expense reconciliation adjustments.

    Find out about:

    Section 40-880 deduction

    Immediate deductibility for business-related start-up costs

    Section 40-880 of the Income Tax Assessment Act 1997 allows for certain start-up expenses to be immediately deductible where they are incurred by:

    • a small business entity or an entity that would be a small business entity if the aggregated turnover threshold was less than $50 million or
    • an entity that is not in business

    If you are an individual (operating either alone or in partnership), the non-commercial loss provisions may apply to defer your deduction to a later income year.

    See also:

    Five-year write-off for a range of business-related costs not recognised elsewhere in the tax law

    Section 40-880 also provides a five-year write-off for certain capital expenditure incurred by you in relation to a past, present or prospective business if the expenditure is not already taken into account or not denied a deduction by another provision.

    You can claim a deduction for capital expenditure:

    • in relation to your business
    • in relation to a business that used to be carried on, such as capital expenses incurred in order to cease the business
    • in relation to a business proposed to be carried on, such as the costs of feasibility studies, market research or setting up the business entity
    • as a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership (the company, trust or partnership must have carried on a business).

    If you incur expenditure in relation to your existing business, a business that you used to carry on or a business that you propose to carry on, the expenditure is deductible to the extent the business is, was or is proposed to be carried on for a taxable purpose.

    You can deduct 20% of the expenditure in the year you incur it and in each of the following four years. However, for some pre- and post-business expenditure you may have to defer your claim for a deduction because the non-commercial loss rules apply.

    See also:

    The deduction can't be claimed for capital expenditure in certain circumstances such as it is deductible under another provision or forms part of the cost of land. See Business related costs – section 40-880 deductions.

    If you have incurred relevant capital expenses that relate to a business that ceased in a previous income year and you carried on the business as a sole trader or through a partnership, claim the expenses here. If you carried on the business through a company or trust, you claim the amount deductible (20%) at Other deductions on your tax return.

    You must show any recoupment of the expenditure as assessable income, either at Other business income or Income reconciliation adjustments.

    Business deduction for project pool

    Certain capital expenditure you incurred after 30 June 2001, which was directly connected with a project that you carried on (or proposed to carry on) for a taxable purpose, can be allocated to a project pool and written off over the 'project life'. The expenditure must not otherwise be deductible or form part of the cost of a depreciating asset you hold or held.

    Each project has a separate project pool.

    For more information, see Project pools.

    A deduction is available from the income year in which you started to operate a project to gain or produce assessable income until when it stops operating. Use the Project pool calculator (XLS, 122KB)This link will download a file to calculate your project pool deduction.

    The pool value can be subject to adjustments, for example, a foreign exchange (forex) adjustment may apply where you met an obligation to pay foreign currency incurred as a project amount which you had allocated to a project pool.

    Any recoupment of the expenditure must be shown as assessable income either at Other business income or Income reconciliation adjustments.

    Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset

    Landcare operations expenses

    You can claim a deduction for capital expenses on a landcare operation for land in Australia if you are:

    • a primary producer
    • a business using rural land for a taxable purpose (except when mining or quarrying)
    • an irrigation water provider (if your expenditure incurred on or after 1 July 2004).

    Your deduction will be reduced if you use the land for a non-taxable purpose, such as your home.

    To learn more, visit:

    You may need to show any recoupment of the expenditure as assessable income either at Other business income or Income reconciliation adjustments.

    Water conservation and conveyance facilities

    You may be entitled to claim a deduction for capital expenditure on a water facility if you are:

    • a primary producer
    • an irrigation water provider.

    To learn more, visit:

    These deductions are not available to a partnership. Costs incurred by a partnership for facilities to conserve or convey water are allocated to each partner who can then claim the relevant deduction for their share of the expenditure.

    You may need to show any recoupment of the expenditure as assessable income either at Other business income or Income reconciliation adjustments.

    Fencing assets

    You can claim a deduction for the decline in value of a fencing asset. A fencing asset includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension to a fence.

    To learn more, visit:

    You may need to show any recoupment of the expenditure as assessable income either at Other business income or Income reconciliation adjustment.

    Fodder storage assets

    You can claim a deduction for the decline in value of a fodder storage asset. A fodder storage asset is an asset that is primarily and principally for the purpose of storing fodder.

    It includes a structural improvement, a repair of a capital nature, or an alteration, addition or extension, to an asset or structural improvement, that is primarily and principally for the purpose of storing fodder.

    To learn more, visit:

    You may need to show any recoupment of the expenditure as assessable income either at Other business income or Income reconciliation adjustments.

    Small business entities

    The amount you show here must not include any amount relating to a depreciating asset used in your primary production business if you have chosen to claim a deduction for it under the small business entity depreciation rules.

    Income and expense reconciliation adjustments

    You may need to make income reconciliation adjustments or expense reconciliation adjustments. These adjustments reconcile your business operating profit or loss with your business taxable income.

    Do not complete any income reconciliation adjustments or expense reconciliation adjustments if all the amounts you have shown between ABN not quoted and Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset (inclusive) are assessable income or allowable tax deductions for income tax purposes.

    If you have included amounts such as exempt income or non-deductible expenses or have not included amounts which are assessable income or expenditure that is deductible, you must work out your reconciliation adjustments.

    Completing Income and Expense reconciliation adjustments
    1. Complete worksheet 2 using the explanations provided. This will give you your total income and expense reconciliation adjustment amounts.
    2. Transfer the totals in the Income reconciliation adjustments (below row g) and the Expense reconciliation adjustments (below row u) on the worksheet to the appropriate fields.
    Worksheet 2 – Reconciliation statement

    Reconcile your primary production and non-primary production items separately.

    Part 1a: Income reconciliation adjustments – Additions

    Row

    Calculation elements

    Primary production

    Non-primary production

    a

    Assessable balancing adjustment amounts on disposal of depreciating assets

    $

    $

    b

    Assessable business income not included in the profit and loss statement

    $

    $

    c

    Subtotal: add the amounts at row a and row b.

    $

    $

    Part 1b: Income reconciliation adjustments – Subtractions

    Row

    Calculation elements

    Primary production

    Non-primary production

    d

    Net exempt income (gross exempt income less expenses relating to that exempt income)

    $

    $

    e

    Profit on sale of depreciating assets included in accounts

    $

    $

    f

    Other non-assessable income included in the profit and loss statement

    $

    $

    g

    Subtotal: add the amounts at rows d, e and f.

    $

    $

     


    Income reconciliation adjustments: take the amount at row g away from the amount at row c.

    $

    $

    Part 2a: Expense reconciliation adjustments – Additions

    Row

    Calculation elements

    Primary production

    Non-primary production

    h

    Depreciation charged in accounts (see note 1)

    $

    $

    i

    Lease payments for luxury cars

    $

    $

    j

    Loss on sale of depreciating assets included in accounts

    $

    $

    k

    Part of prepaid expenses not deductible this year

    $

    $

    Part 2b: Expense reconciliation adjustments – Items not allowable as deductions

    Row

    Calculation elements

    Primary production

    Non-primary production

    l

    Capital expenditure

    $

    $

    m

    Additions to provisions and reserves

    $

    $

    n

    Other non-deductible items, including income tax

    $

    $

    o

    Subtotal: add the amounts at rows h, i, j, k, l, m and n.

    $

    $

    Part 2c: Expense reconciliation adjustments – Subtractions

    Row

    Calculation elements

    Primary production

    Non-primary production

    p

    Accrual amount deduction for lessee of luxury cars

    $

    $

    q

    Deductible balancing adjustment amounts on disposal of depreciating assets

    $

    $

    r

    Deduction for decline in value of depreciating assets

    $

    $

    s

    Part of prepaid expenses deductible this year but not included elsewhere

    $

    $

    t

    Other items deductible for tax purposes not included in the profit and loss statement (see note 4)

    $

    $

    u

    Subtotal: add the amounts at rows p, q, r, s and t.

    $

    $

    Expense reconciliation adjustments: take the amount at row u away from the amount from row o.

    $

    $

    Notes:

    1. Include amounts at row h only if you are not using the simplified depreciation rules. However, exclude any pool deductions which you have included at
      Depreciation expenses which relate to a continuing small business pool.
    2. See Guide to depreciating assets for an explanation of depreciating assets.
    3. If you have included an amount of capital expenditure incurred to terminate a lease or licence at Lease expenses, make a reconciliation adjustment at Expense reconciliation adjustments by including the amount of capital expenditure as an expense add back and taking away that part of the expense which is allowed as a tax deduction.
    4. Do not include the following in the amount at row t:  
      • section 40-880 deductions
      • business deductions for project pools
      • deductions for landcare operations, water facilities, fencing assets and fodder storage assets.
       

    Reconciliation adjustments for these amounts are shown separately at:

    • Section 40-880 deduction
    • Business deduction for project pool
    • Landcare operations and business deduction for decline in value of water facility, fencing asset and fodder storage.
    What are income reconciliation adjustments?

    Income reconciliation adjustments include:

    • income add backs; this is income not shown in the accounts which is assessable income for tax purposes, such as  
      • assessable balancing adjustment amounts on disposal of depreciating assets
      • other assessable income not included in the profit and loss statement
       
    • income subtractions; this is income shown in the accounts which is not assessable income, such as        
      • profit on sale of depreciating assets
      • other income that is not assessable for income tax purposes, for example, gross exempt income and non-assessable non-exempt income.
      • cash flow boost payments if they have been included in other business income.
       

    Your income reconciliation adjustment is your total income add backs less your total income subtractions.

    Use worksheet 2 to work out your income reconciliation adjustments for your primary and non-primary production businesses.

    What are expense reconciliation adjustments?

    Expense reconciliation adjustments include the following.

    • Expense add backs are expenses shown in the accounts which are not tax deductible, such as  
      • prepaid expenses not deductible in this year
      • depreciation
      • loss on sale of a depreciating asset
      • other items not allowable as a deduction, for example  
        • capital expenditure
        • additions to provisions and reserves
        • income tax expense
        • expenses relating to exempt income
        • debt deductions denied by the thin capitalisation rules
        • other non-deductible expenses.
         
       
    • Expense subtractions are items not shown as expenses in the accounts but which are deductible for tax purposes, such as  
      • prepaid expenses from a prior year that are deductible this year but not included elsewhere
      • deduction for decline in value of depreciating assets
      • deductible balancing adjustment amounts on disposal of depreciating assets
      • deduction for environmental protection expenses
      • other items deductible for tax purposes.
       

    Your expense reconciliation adjustment is your total expense add backs less your total expense subtractions.

    Use worksheet 2 to work out your expense reconciliation adjustments for your primary and non-primary production businesses.

    See Thin capitalisation and PSI deductions.

    Specific reconciliation adjustments

    Following are examples of specific reconciliation adjustments that may apply to you.

    If you were previously in the STS read Former STS taxpayers below first. Otherwise, go to Depreciating assets deducted under the simplified depreciation rules.

    Former STS taxpayers

    Make adjustments in this section if you:

    • are eligible and have chosen to continue using the STS accounting method and the amounts you have shown at the Income and Expense sections are not based on the STS accounting method, or
    • stopped using the STS accounting method in 2020–21.

    These adjustments are explained in more detail at Adjustments when ceasing to use the STS accounting method.

    Worksheet 2 will assist you with your calculations.

    Income derived but not received as at 30 June 2021 and expenses incurred but not paid as at 30 June 2021

    If you are eligible and have chosen to continue using the STS accounting method and have included amounts:

    • of ordinary income that have been derived but not received in 2020–21, the amounts not received are not assessable this year, for example, trade debtors as at 30 June 2021. These amounts form part of your income reconciliation adjustments. Include these amounts at row f on worksheet 2.
    • for general deductions, repairs and tax-related expenses that have been incurred but not paid in 2020–21, the amounts not paid are not deductible this year, for example, trade creditors as at 30 June 2021. These amounts form part of your expense reconciliation adjustments. Include these amounts at row n on worksheet 2

    Adjustments when ceasing to use the STS accounting method

    If you have discontinued using the STS accounting method read on.

    If you have not included at the Business income section any amounts of ordinary income that were derived but not received while using the STS accounting method, these amounts are assessable this year, for example, trade debtors as at 30 June 2020.

    Include these amounts at row b on worksheet 2.

    If you have not included at the Business expenses section any amounts of general deductions, repairs or tax-related expenses that were incurred but not paid while using the STS accounting method, these amounts are deductible this year, for example, trade creditors as at 30 June 2020.

    Include these amounts (other than tax-related expenses) at row t on worksheet 2. Enter your deduction for tax-related expenses at Cost of managing tax affairs.

    Disposal of depreciating assets

    If you disposed of depreciating assets during the income year, the following amounts form part of your income reconciliation adjustments:

    • the taxable purpose proportion of the termination value of assets that have been disposed of for which an immediate deduction has been claimed either this year or in a prior year
    • if the closing pool balance of a general small business pool is less than zero, the amount below zero
    • assessable balancing adjustment amounts on the disposal of depreciating assets not allocated to a general small business pool.

    Include the amounts at row b on worksheet 2.

    Any deductible balancing adjustment amounts on the disposal of depreciating assets that you have not allocated to a small business pool form part of your Expense reconciliation adjustments. Include these amounts at q on worksheet 2.

    See also:

    • Guide to depreciating assets, or you can work out your depreciation and capital allowance claims by using the Depreciation and capital allowances tool.

    Prepaid expenses

    Special rules may affect the timing of deductions for prepaid expenditure. Under these rules you may need to apportion certain prepaid expenses over more than one income year. You must make an expense reconciliation adjustment to add back that part of the expense that is not deductible in the year it is incurred. Show the adjustment at row k on worksheet 2.

    If you had a prepaid expense in a prior year which is to be apportioned over the service period and you are entitled to a deduction for part of the expense this year but have not included it elsewhere, show the adjustment as an expense subtraction at row s on worksheet 2.

    See also Deductions for prepaid expenses.

    Deduction for decline in value

    You only add back amounts of depreciation expenses if you are not a small business entity using the simplified depreciation rules. If you are a small business entity using the simplified depreciation rules your tax deduction for decline in value is instead included in the amount at Depreciation expenses.

    A deduction for a decline in value of a depreciating asset calculated under income tax law may differ from the accounting or book calculation of depreciation. Different rules regarding such things as effective life, the calculation of balancing adjustment amounts and the treatment of debt forgiveness amounts can produce a discrepancy between the two calculations.

    Under income tax law you can deduct an amount equal to the decline in value of a depreciating asset in 2020–21 if you held the depreciating asset for any time during the year and used it (or installed it ready for use) for a taxable purpose, such as for producing assessable income.

    The deduction is reduced by the extent you do not use the asset for a taxable purpose.

    To help you calculate your deduction for decline in value, use the Depreciation and capital allowances tool, or see Guide to depreciating assets which also provides explanations of relevant terms. The publication also explains:

    There are a number of tax depreciation incentives that you may be able to apply. Your eligibility for each of the incentives depends on your aggregated turnover. If more than one incentive could apply to the asset, the order of application is (subject to opt out choices):

    For information explaining the depreciation incentives that are available and when businesses could consider using them, see Interaction of tax depreciation incentives.

    Temporary full expensing

    Businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets. The eligible new assets must be first held, and first used or installed ready for use for a taxable purpose, between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

    For businesses with an aggregated turnover of less than $50 million, temporary full expensing also applies to the business portion of eligible second-hand depreciating assets.

    Businesses can also immediately deduct the business portion of the cost of improvements to eligible depreciating assets (and to assets acquired before 7.30pm AEDT on 6 October 2020 that would otherwise be eligible assets) if those costs are incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

    If a balancing adjustment event happens to an eligible asset in the same income year as when you first used the asset for a taxable purpose, you cannot deduct the cost of the asset (including costs of improvements) under temporary full expensing.

    You also cannot deduct the costs of improvements under temporary full expensing if a balancing adjustment event happens in the income year you incurred those costs.

    You can make a choice to opt-out of temporary full expensing for an income year on an asset-by-asset basis. If you are making a choice to opt-out of temporary full expensing you must notify us by recording that choice at Temporary full expensing.

    Instant asset write-off

    Eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.

    Businesses with an aggregated turnover of more than $10 million but less than $500 million can claim an instant asset write-off for assets costing less than $150,000 that were:

    • purchased from 7.30pm (AEDT) on 2 April 2019 to 31 December 2020, and
    • first used, or installed ready for use, between 1 July 2020 and 30 June 2021.

    Backing business investment

    Businesses are eligible for the backing business investment – accelerated depreciation deduction if they have an aggregated turnover of less than $500 million in the year they are claiming the deduction.

    To be eligible to apply the accelerated rate of deduction under backing business investment, 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
    • be 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 either  
      • temporary full expensing
      • the instant asset write-off rules.
       

    If you are eligible for backing business investment – accelerated depreciation, you can choose to not apply these rules to an asset. The choice can be made on an asset-by-asset basis but cannot be changed once made. If you are making a choice to opt-out of backing business investment you must notify us by recording that choice at Backing business investment opt out.

    If you choose to use the low-value pool method to calculate the decline in value of low-cost or low-value depreciating assets and the pool contains assets used for work-related, self-education or non-business rental purposes, read Low value pool deduction. Do not include the deduction at the Business income or losses section. If none of the depreciating assets in the pool is used for any of those purposes, include the amount of your low-value pool deduction at row r on worksheet 2. Where necessary, make a reasonable apportionment between primary production and non-primary production activities.

    You should also include the deduction for decline in value of depreciating assets not allocated to a pool at row r on worksheet 2.

    You should also add back the depreciation charged in your accounts and shown at Depreciation expenses in the Business Expenses section as an expense reconciliation adjustment. Include the amount at row h on worksheet 2. The amount at row h should not include any small business pool deductions which you have claimed at Depreciation expenses.

    Luxury car leasing

    A leased car, either new or second-hand, is a luxury car if its cost exceeds the car limit that applies for the income year in which the lease commences. The car limit for 2020–21 is $59,136.

    A luxury car lease (other than genuine short-term hire arrangements) is treated as a notional sale-and-loan transaction.

    The cost or value of the car specified in the lease (or the market value if the parties were not dealing at arm’s length in connection with the lease) is taken to be the cost of the car for the lessee and the amount loaned by the lessor to the lessee to buy the car.

    In relation to the notional loan, the actual lease payments are divided into notional principal and finance charge components. That part of the finance charge component for the notional loan applicable for the particular period (the accrual amount) is deductible to the lessee, subject to any reduction required under the thin capitalisation rules.

    The amount forms part of your expense reconciliation adjustments. Include the amount at row p on worksheet 2.

    In relation to the notional sale, the lessee is treated as the holder of the luxury car and may be entitled to claim a deduction for the decline in value of the car. If the lessee is a small business entity using the simplified depreciation rules for the income year in which the lease is entered into, the lessee allocates the car to their general small business pool.

    For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the income year in which the lease is granted.

    For more information on deductions for the decline in value of leased luxury cars, see Guide to depreciating assets.

    In summary, the lessee is entitled to deductions equal to:

    • the accrual amount
    • the decline in value of the luxury car, based on the applicable car limit, unless the car is allocated to the general small business pool.

    You reduce both deductions to reflect any use of the car for a non-taxable purpose.

    Where you allocated the car to the general small business pool with the cost based on the applicable car limit, see Calculating your depreciation deductions.

    If you have included the lease expense at Lease expenses in the Business expenses section, the amount should also form part of your expense reconciliation adjustments. Include the amount at row i on worksheet 2. Include the deduction for the accrual amount at row p.

    If the lease terminates or is not extended or renewed and the lessee does not actually acquire the car from the lessor, the lessee is treated under the rules as disposing of the car by way of sale to the lessor. This constitutes a balancing adjustment event. If the car is not subject to the simplified depreciation rules, any assessable or deductible balancing adjustment amount for the lessee must be determined. If the car has been allocated to the lessee’s general small business pool, see General depreciation rules – capital allowances for small business entities.

    Hire-purchase agreements

    Hire-purchase and instalment sale agreements of goods are treated as a sale of the property by the financier (or hire-purchase company) to the hirer (or instalment purchaser).

    The sale is treated as being financed by a loan from the financier to the hirer at a sale price of either their agreed cost or value or the property’s arm’s length value.

    The periodic hire-purchase (or instalment) payments are treated as payments of principal and interest under the notional loan. The interest component is deductible to the hirer, subject to any reduction required under the thin capitalisation rules. This amount forms part of the expense reconciliation adjustments. Include the amount at row t on worksheet 2.

    In relation to the notional sale, the hirer of a depreciating asset is treated as the holder of the asset and either allocates the asset to the appropriate small business pool if they are a small business entity using the simplified depreciation rules for the income year, or may be entitled to claim a deduction for the decline in value of the depreciating asset. The cost of the asset for this purpose is taken to be the agreed cost or value, or the arm’s length value if the dealing is not at arm’s length.

    If you have included hire-purchase charges as an expense, the amount should also form part of your expense reconciliation adjustments. Include the amount at row n on worksheet 2.

    Termination of a limited recourse debt

    Excessive deductions for capital allowances are included in assessable income under the limited recourse debt rules contained in Division 243 of the ITAA 1997. This will occur where:

    • expenditure on property has been financed or re-financed wholly or partly by the limited recourse debt
    • the limited recourse debt is terminated after 27 February 1998 but has not been paid in full by the debtor
    • because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor. Special rules apply in working out whether the debt has been fully paid.

    A limited recourse debt is a debt where the rights of the creditor as against the debtor, in the event of default in payment of the debt or of interest, are limited wholly or predominantly to the property which has been financed by the debt or is security for the debt, or rights in relation to such property. A debt is also a limited recourse debt if, notwithstanding that there may be no specific conditions to that effect, it is reasonable to conclude that the creditor’s rights as against the debtors are capable of being so limited.

    A limited recourse debt includes a notional loan under a hire-purchase or instalment sale agreement of goods to which Division 240 of the ITAA 1997 applies, see section 243-20.

    The amount that is included within assessable income as a result of these provisions forms part of your income reconciliation adjustments. Include the amount at row b on worksheet 2.

    Deferred non-commercial business losses from a prior year

    A deferred non-commercial business loss is a loss you incurred in a prior year which you were unable to claim against other income. If your activity is carried on partly in Australia and partly overseas phone 13 28 66 or see How to defer your losses.

    Your prior year deferred non-commercial business loss for a business activity may be reduced if you earned net exempt income in 2020–21.

    If you became bankrupt (or received a relief from debt) the deferred losses will no longer be available. The loss can't be deducted in the current year or any future year.

    See also:

    Other business and professional items

    Find out about:

    Small business entity simplified depreciation

    Small business entities can claim an immediate deduction for most depreciating assets purchased from 7.30pm (AEST) on 12 May 2015 and on or before 31 December 2020 and first used or installed ready for use for a business purpose:

    • from 12 March 2020 to 30 June 2021, if they cost less than $150,000 each (the instant asset write-off threshold)

    For assets you start to hold, and first use (or have installed ready for use) for a taxable purpose from 7.30pm (AEDT) on 6 October 2020 to 30 June 2022, the instant asset write-off threshold does not apply to businesses using the simplified depreciation rules. You must immediately deduct the business portion of the asset's cost under temporary full expensing.

    See also:

    To complete the fields in small business entity simplified depreciation, use the:

    • Depreciation and capital allowances tool, or
    • amounts you calculated for small business entity depreciation deductions in worksheet 1 and follow the steps.

    You must enter the depreciation deductions, not the pool balances.

    1. At Deduction for certain assets, enter the total amount you claimed at Depreciation expenses that meet all the following:  
      • assets cost less than $150,000
      • purchased before 7.30pm (AEDT) 6 October 2020
      • first used or installed ready for use for a taxable purpose in the current year.
       

    If you have used worksheet 1, this amount is a component of row a but does not include any amounts relating to temporary full expensing.

    1. At Deduction for general small business pool, enter the total amount you claimed at Depreciation expenses relating to the general small business pool.

    If you have used worksheet 1, this amount is from row b.

    If you claimed any depreciation using temporary full expensing you will need to include those amounts at Temporary full expensing.

    Temporary full expensing

    Choosing to opt out of temporary full expensing for some or all of your eligible assets

    Small business entities using simplified depreciation rules cannot opt out of temporary full expensing.

    Other businesses can choose to opt out of temporary full expensing on an asset-by-asset basis and apply the other depreciation rules to that asset. You make this choice for a particular depreciating asset for each applicable income year. Once a choice is made it cannot be revoked.

    Number of assets you are opting out for

    Enter the number of assets for which you made the choice to opt out of temporary full expensing.

    Value of assets you are opting out for

    Enter the value of the assets for which you made the choice to opt out of temporary full expensing. The value is the amount you would have otherwise claimed for these assets under temporary full expensing if you had not made the choice to opt out.

    You will not be penalised for specifying an incorrect number or value of assets where you have made your best attempt to determine the number and value of assets you are opting out for.

    Temporary full expensing deductions

    Enter the total amount of the deductions that you are claiming under temporary full expensing. This is the amount you would have included as part of your depreciation amount.

    Number of assets you are claiming for

    Enter the number of assets for which you are claiming temporary full expensing.

    You will not be penalised for specifying an incorrect number of assets where you have made your best attempt to determine the number of assets you are claiming for.

    See also:

    Backing business investment opt out

    Small business entities using the simplified depreciation rules do not complete this item.

    For your assets to be eligible for Backing business investment – accelerated depreciation you must meet certain conditions. See Backing business investment.

    Choosing to opt out of backing business investment for some or all of your eligible assets

    You may choose to opt out of the backing business investment incentive on an asset-by-asset basis. You then apply the general capital allowance rules for that asset. Once a choice is made it cannot be revoked.

    Number of assets you are opting out for

    Enter the number of assets for which you are opting out of Backing business investment accelerated depreciation.

    Value of assets you are opting out for

    Enter the cost of the assets for which you are opting out of Backing business investment accelerated depreciation.

    You will not be penalised for specifying an incorrect number or value of assets where you have made your best attempt to determine the number and value of assets you are opting out for.

    See also:

    Other

    Trade debtors

    This is the total amount owing to the business at the end of the year for goods and services provided during the 202021 (that is, current trade and other debtors).

    Work out and enter the total amount owing from trade and other debtors. If you have more than one business, add up all trade and other debtor amounts.

    Trade creditors

    This is the total amount owed by the business at the end of the year for goods and services received during the 202021 (that is, current trade and other creditors).

    Work out and enter the total amount owing to trade and other creditors. If you have more than one business, add up all trade and other creditor amounts.

    Total salary and wage expenses

    Salary, wages and other labour costs actually paid or payable to persons employed in your business (excluding those forming part of capital expenditure or paid for private domestic assistance) are usually deductible. However, you can't be an employee of your business. Payments to you of salary are not allowable deductions in calculating your income or loss; treat these payments as an allocation of profits.

    Include any salary and wage component of Cost of sales, such as

    • allowances
    • bonuses
    • casual labour
    • retainers and commissions paid to people who received a retainer, and
    • workers compensation paid through the payroll.

    Also include:

    • direct and indirect labour
    • holiday pay
    • locums
    • long service leave
    • lump sum payments
    • other employee benefits
    • overtime
    • payments under an incentive or profit-sharing scheme
    • retiring allowances, and
    • sick pay.

    Include any salary or wages paid to relatives and other related entities both here and at Payments to associated persons.

    Exclude:

    • agency fees
    • contract payments
    • sub-contract payments
    • service fees
    • superannuation
    • management fees and consultant fees, and
    • payments made from 1 July 2020 where you have not complied with the pay as you go (PAYG) withholding and reporting obligations for those payments.

    See also:

    Payments to associated persons

    These are amounts, including salary, wages, commissions or allowances, paid to your relatives. These also include superannuation contributions paid for the benefit of your relatives.

    You must also include amounts of salary or wages paid to your relatives and a partnership in which your relatives are partners at Total salary and wage expenses.

    You need to keep the following records:

    • full name of relatives or related partnerships
    • age, if under 18 years old
    • relationship
    • nature of duties performed
    • hours worked
    • total remuneration
    • salary or wages claimed as deductions
    • other amounts paid, for example, retiring gratuities, bonuses and commissions.

    Excessive or unreasonable payments to your relatives, or a partnership in which your relatives are partners, may not be deductible. The PSI rules (see Personal services income (PSI)) also limit deductions for payments to associates.

    Intangible depreciating assets first deducted

    Do not complete this field if you use the simplified depreciation rules.

    The following intangible assets are regarded as depreciating assets (as long as they are not trading stock):

    • certain items of intellectual property, such as patents, registered designs, copyrights and certain types of licences
    • computer software (or a right to use computer software) that you acquire, develop or have someone else develop for your use for the purposes for which it is designed (in-house software)
    • mining, quarrying or prospecting rights and information
    • certain indefeasible rights to use a telecommunications cable system
    • certain telecommunications site access rights
    • spectrum licences
    • datacasting transmitter licences.

    A depreciating asset that you hold starts to decline in value from the time you use it or install it ready for use for any purpose, including a private purpose. However, you can only claim a deduction for the decline in value to the extent that you use the asset for a taxable purpose, such as for producing assessable income.

    You need to show the cost of all intangible depreciating assets for which you are claiming a business deduction for decline in value for the first time. If you have allocated any intangible depreciating assets with a cost of less than $1,000 to a low-value pool for the income year, you also need to include the cost of those assets here. Do not reduce the cost for estimated non-taxable use.

    Expenditure on in-house software that you allocated to a software development pool is not shown here.

    This must include any amounts claimed under the instant asset write-off, temporary full expensing and backing business investment rules.

    See also:

    Other depreciating assets first deducted

    Do not complete this field if you use the simplified depreciation rules.

    A depreciating asset that you hold starts to decline in value from the time you use it or install it ready for use for any purpose, including a private purpose. However, you can claim a deduction for the decline in value only to the extent you use the asset for a taxable purpose, such as for producing assessable income.

    You need to include the cost of all depreciating assets (other than intangible depreciating assets) for which you are claiming a business deduction for the decline in value for the first time.

    If you have allocated any depreciating assets with a cost of less than $1,000 to a low-value pool for 2020–21, you also need to include the cost of those assets here. Do not reduce the cost for estimated non-taxable use.

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

    See also:

    Termination value of intangible depreciating assets

    Do not complete this field if you use the simplified depreciation rules.

    Don't show at this field any consideration you received during 2020–21 in relation to in-house software for which you have allocated expenditure to a software development pool.

    Include the termination values for intangible depreciating assets (including intangible assets allocated to a low-value pool) that you stopped holding or using during 2020–21 (for example, assets you sold, or that were lost or destroyed).

    Generally, the termination value is the amount you received or are deemed to have received for the asset that you stopped holding or using. It includes the market value of any non-cash benefits, such as goods and services, you received for the asset.

    Include amounts you received or are deemed to have received for all intangible depreciating assets that you stopped holding or using in your business, other than:

    • assets allocated in a prior year to the general small business pool or the formerly available long-life small business pool
    • low-cost assets for which an immediate deduction has been allowed under the simplified depreciation rules
    • in-house software for which you allocated expenditure to a software development pool.

    If you have more than one business, add up the termination value of intangible depreciating assets amounts for each business.

    See also:

    Termination value of other depreciating assets

    Do not complete this field if you use the simplified depreciation rules.

    You include the termination values for other depreciating assets (including assets allocated to a low-value pool) that you stopped holding or using during 2020–21 (for example, assets you sold, or that were lost or destroyed).

    Generally, the termination value is the amount you received or are deemed to have received for the asset that you stopped holding or using. It includes the market value of any non-cash benefits, such as goods and services, you received for the asset.

    Include amounts you received or are deemed to have received for all depreciating assets that you stopped holding or using in your business other than:

    • intangible depreciating assets
    • assets allocated in a prior year to the general small business pool or the formerly available long-life small business pool
    • low-cost assets for which an immediate deduction has been allowed under the simplified depreciation rules
    • buildings or structures for which a deduction is available under the capital works provisions
    • assets falling within the provisions relating to investments in Australian films.

    If you have more than one business, add up the termination value of other depreciating assets for each business.

    See also:

    Trading stock election

    If you have valued trading stock on hand at the end of 2020–21 at an amount that is less than the lowest amount available using one of the valuation methods at Closing stock, you must notify the Commissioner.

    If you must notify the Commissioner about your trading stock election, select Yes.

      Last modified: 01 Jun 2021QC 65554