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  • Depreciation and capital expenses and allowances

    You generally can't deduct spending on capital assets immediately. Instead you claim the cost over time, reflecting the asset's depreciation (or decline in value).

    This applies if you use depreciating assets to earn assessable income, including:

    • small and large businesses
    • rental property investors
    • employees (for equipment and tools they provide at their own expense for use in their work).

    A depreciating asset is one that has a limited effective life and can reasonably be expected to decline in value over the time it's used. Land, trading stock and some intangible assets are not depreciating assets.

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    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. Corporate tax entities unable to meet the $5 billion turnover test may still be eligible for temporary full expensing under the alternative test. 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 2023.

    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.

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    Instant asset write-off

    For assets first used or installed ready for use from 12 March 2020 until 30 June 2021, and purchased by 31 December 2020, the instant asset write-off:

    • threshold is $150,000 (up from $30,000)
    • eligibility range covers businesses with an aggregated turnover of less than $500 million (up from $50 million).

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    Backing business investment

    From 12 March 2020 until 30 June 2021, the backing business investment measure provides a time-limited (15 month) investment incentive to support business investment and economic growth, by accelerating depreciation deductions.

    The key features of the incentive are as follows:

    • The benefits are either     
      • deduction of 50% of the cost or opening adjustable value of an eligible asset on installation. Existing depreciation rules apply to the balance of the asset’s cost
      • if you are using the simplified depreciation rules for small business, you can claim 57.5% of the cost of the asset in the first year you add the asset to the small business pool.
    • Eligible businesses – businesses with aggregated turnover below $500 million.
    • Eligible assets – new depreciating assets (for example, plant, equipment and specified intangible assets, such as patents). The assets must be first held, and first used or first installed ready for use for a taxable purpose on or after 12 March 2020 until 30 June 2021. Some exclusions apply.

    If you choose not to apply backing business investment to an asset, you apply the general depreciation rules to that asset.

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    Eligible businesses may want to know which tax depreciation incentive is right for them.

    We have prepared a high-level snapshot to help you work out how temporary full expensing, instant asset write-off or backing business investment incentives may apply to you.

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    General depreciation rules

    To calculate your depreciation deduction for most assets you apply the general depreciation rules (unless you're eligible to use simplified depreciation for small business). These rules set out the amounts (capital allowances) that can be claimed based on the asset's effective life.

    Under the general depreciation rules, an immediate write-off applies to:

    • items costing up to $100 that are used to earn business income (but note the higher immediate write-off limit for small businesses below)
    • items costing up to $300 that are used to earn income other than from a business (such as employee-provided tools and equipment).

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    Simplified depreciation rules

    Small businesses can choose to use the simplified depreciation rules – which include the instant asset write-off.

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    Other depreciation rules

    Different rules apply to:

    • capital works – which are written off over a longer period than other depreciating assets
    • other business capital expenses – such as the cost of setting up or ceasing a business, and project-related expenses.

    Depreciation deductions are generally available only to the legal owner of the asset. However, hire purchase arrangements are generally treated as a notional sale of goods. In this case, the hirer rather than the legal owner is entitled to the deduction. Depreciation deductions for partnership assets are claimed by the partnership not the individual partners.

    The cost of an asset for depreciation purposes includes the amount you paid for it, as well as any additional costs you incur in transporting and installing the asset and repairing it immediately after you acquire it.

    Depreciation deductions are limited to the extent to which you use an asset to earn income. For example, if you use an asset 60% for business purposes and 40% for private purposes, you can only claim 60% of its total depreciation for the year.

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    Last modified: 23 Jun 2021QC 17053