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  • Buying and using assets

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    Timing

    An asset must be first bought and used, or installed ready-for-use in the year you claim the deduction under the simplified depreciation rules. For example, a trailer that was purchased and stored in the shed but not yet fitted out for the intended business purpose would not be eligible.

    Cost

    The cost of an asset includes both the amount you paid for it and any additional amounts you spent on transporting and installing it ready for use. The cost also includes amounts you spent on improving the asset.

    If you are registered for the goods and services tax (GST), you exclude the GST amount you paid on the asset when you calculate your depreciation amounts (and your instant asset write-off threshold is $20,000 exclusive of any GST). This is because you will claim as a credit the GST paid in your activity statement for the relevant period. Our examples assume your business is registered for GST and unless otherwise stated, the GST has already been excluded.

    If you are not registered for GST, you include the GST amount you paid on the asset in your depreciation calculations (and your instant asset write-off threshold is $20,000 inclusive of any GST).

    Trade-ins

    When you trade a car or any other asset, typically the agreed price of your trade-in is deducted from the cost of your new asset. The sale and purchase of the asset generally appear as one transaction.

    However, for the purpose of the simplified depreciation rules, the transactions are considered separate. If the purchase price of your asset (irrespective of the amount you were paid for your trade-in) is $20,000 or more, then it needs to be added to the small business pool and can't be immediately written-off.

    Example: Trade-in asset depreciation

    Marilyn has a ceramic studio which qualifies as a small business. On 8 August 2017, Marilyn trades her old personal car for $11,000 and buys a new car (that is also used 100% for business purposes) at a cost of $28,000. Although only $17,000 out of pocket, she must add the car to the small business pool as it cost $28,000.

    For depreciation purposes, there have been two transactions, the purchase of the new car for $28,000 and the sale of the existing car for $11,000. Marilyn must both add the purchase amount and subtract the sale amount from her small business pool.

    End of example

    Business use vs private use

    The amount that you claim as a depreciation deduction is determined by how much you use the asset to earn assessable income.

    You need to make an estimate (as a percentage) of how much you will use a depreciating asset in earning assessable income. This is referred to as the taxable purpose proportion.

    You need to apply the following formula for every asset you acquire to work out either your instant asset write-off or the amount to include in your small business pool.

    Cost of asset × Taxable purpose proportion

    Example: Estimating business use

    Having purchased a car for $18,000, Brendan estimates that it is used 50% for business purposes. As the cost of the car is under the instant asset write-off threshold, Brendan writes it off in the year he acquired it. His deduction is $9,000 as he only claims for the proportion the asset is used in earning income.

    If the purchase price of the car was $22,000 and Brendan estimated the car would be used 50% in his business, he would place $11,000 for the car in his small business pool and depreciate 15% in the first year. The asset is still placed in the small business pool because the cost of the asset before determining the taxable purpose proportion exceeded the instant asset threshold.

    End of example

    Changes in business use

    You must review how much an asset is used for business and other taxable purposes in each of the first three years.

    If this proportion changes by more than 10% from your most recent estimate, you must make an adjustment.

    Work out the adjustment using the following formula:

    Adjustment = Reduction factor × Asset value × (Current year estimate − Last estimate)

    The reduction factor depends on whether the asset was first used, or installed ready to use, for a taxable purpose when you were using the simplified depreciation rules. Use the table below to identify the reduction factor for each asset.

    Table to identify reduction factor for each asset

    Reduction factor

    For assets first used while you were not using the simplified depreciation rules

    For assets first used while you were using the simplified depreciation rules

    For the income year after you allocate it to the pool

    0.70

    0.85

    For the second income year after you allocate it to the pool

    0.49

    0.595

    For the third income year after you allocate it to the pool

    0.343

    0.417

    The asset value is the asset's adjustable value (see Step 1: Work out your opening balance) at the time you first used it, or installed it ready for use, for a taxable purpose.

    The difference between the current year estimate and the last estimate represents the change in your estimate of how much you will use an asset in your business and for other taxable purposes. The last estimate is either your:

    • original estimate
    • previously adjusted estimate.

    If the adjustment reflects an increase in the business or other taxable use proportion, you increase the opening pool balance, and your pool deduction for the year is increased. If the adjustment reflects a decrease in the business or other taxable use proportion, you reduce the opening pool balance, and your pool deduction for the year is reduced.

    Example: Adjusting opening pool balance

    Grace chooses to use the simplified depreciation rules in the 2017–18 income year. Before starting to use these rules, she had a car valued at $22,000 that she used for business purposes 60% of the time. The car is not used for any other taxable purpose. Grace calculates $22,000 × 60% and includes $13,200 in her small business pool since the instant asset write-off threshold was $20,000 for the 2017–18 income year.

    During the 2017–18 income year, Grace increases the usage of the car in her business from 60% to 75%. Because this is an increase of 15%, she must make the following adjustment to the opening pool balance for the 2018–19 income year:

    • Reduction factor × Asset value × (Current estimate − Last estimate)
    • 0.7 × $22,000 × (75% − 60%) = $2,310

    Grace increases the opening balance by $2,310 to reflect the change.

    She must review her estimate of how much the car is used in her business and make any necessary adjustments (where the estimate differs by more than 10%) only for the first three income years up to and including 2019–20.

    End of example

    Assets you already own

    When you start to use the simplified depreciation rules, you apply the simplified depreciation rules to your existing assets (other than excluded assets).

    Next step:

    • Step 1: Work out your opening balance – work out the adjustable value of all your existing assets. The existing assets are allocated to the small business pool at their adjustable values.

    Improvements to assets

    You depreciate improvements to assets under the simplified depreciation rules.

    If the improvement relates to an existing asset in your small business pool you simply add the improvement cost to your pool as a cost addition amount (along with costs incurred when disposing of, or permanently ceasing to use, an asset). The improvement cost you can claim is limited to the taxable purpose proportion of the original asset.

    If you improve an asset that has been written-off under the instant asset write-off rules and the improvement cost also falls below the instant asset write-off threshold, the improvement cost is also written off. This is limited to the taxable purpose proportion of the asset.

    Any subsequent cost additions can't be immediately deducted – instead they are placed into the small business pool.

    See also

    Assets used to earn non-business income

    Under the simplified depreciation rules, you claim a deduction for depreciating assets that relate to income that is not from your business. For example, if you receive salary, wages or investment income that is not from your business and have depreciating assets associated with earning that income, you claim a deduction for those assets.

    Cars

    Allowable methods for deducting car expenses

    If you deduct car expenses using the cents per kilometre basis, you can't also claim a deduction for the car under the simplified depreciation rules (as this method already allows for depreciation).

    If you use the cents per kilometre method, you allocate the car to the small business pool with a business use percentage of 0%, resulting in a zero deduction for depreciation.

    If you change from the cents per kilometre to the logbook method, you'll need to estimate a business use percentage. If the estimated business use is more than 10%, you must use the adjustment formula to adjust the opening pool balance.

    Note that if the car is owned or leased by a company or trust that qualifies for and has chosen to use the simplified deduction rules, its full cost will generally be depreciated under the simplified depreciation rules. In this case, any private use by you or other employees or associates will be subject to fringe benefits tax.

    Example: Changing car depreciation methods

    Raoul begins business in September 2016 and chooses to use the simplified depreciation rules for the 2016–17 income year. In this first year, Raoul claims his car expenses on a cents per kilometre basis.

    Given that he has chosen to use the simplified depreciation rules, the car is allocated to the small business pool with a business use percentage of 0% – so, he can't deduct depreciation for the car in that year.

    In 2017–18, Raoul decides to claim his car expenses using the logbook method, which entitles him to claim depreciation for the car.

    Raoul works out from his logbook that he uses the car 60% of the time for his business in 2017–18. The adjustable value of the car at the time he allocated it to the pool in 2016–17 was $22,000. Because there has been an increase of more than 10% in how much he uses his car in his business, Raoul must adjust the opening pool balance for 2017–18 using the adjustment formula.

    Raoul increases the opening pool balance by:

    • 0.85 × $22,000 × (60% − 0%) = $11,220
    End of example

    Car cost limit for depreciation

    There is a limit on the cost you can use to work out the depreciation of cars and station wagons, including four-wheel drives. The maximum value you can use for calculating your claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car.

    Yearly car limit

    Year

    Limit

    2018–19

    $57,581

    2017–18

    $57,581

    2016–17

    $57,581

    2015–16

    $57,466

    2014–15

    $57,466

    2013–14

    $57,466

    2012–13

    $57,466

    2011–12

    $57,466

    2010–11

    $57,466

    2009–10

    $57,180

    2008–09

    $57,180

    2007–08

    $57,123

    2006–07

    $57,009

    2005–06

    $57,009

    2004–05

    $57,009

    2003–04

    $57,009

    2002–03

    $57,009

    2001–02

    $55,134

      Last modified: 30 Jan 2019QC 21100