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  • Simpler depreciation for small business

    You can choose to use the simplified depreciation rules if you have a small business with an aggregated turnover (the total normal income of your business and that of any associated businesses) of less than:

    • $10 million from 1 July 2016 onwards
    • $2 million for previous income years.

    Simplified depreciation rules for small businesses include:

    • an instant asset write-off for assets that cost less than the relevant threshold
    • a general small business pool for assets that cost the same or more than the relevant threshold, which has simplified calculations to work out the depreciation deduction.

    On this page:

    Recent changes

    From 12 March 2020 until 31 December 2020 the instant asset write-off:

    • threshold amount for each asset is $150,000 (up from $30,000)
    • eligibility has been expanded to cover businesses with an aggregated turnover of less than $500 million (up from $50 million).

    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.

    See also:

    Instant asset write-off

    Under instant asset write-off eligible businesses can:

    • immediately write off the cost of each asset that cost less than the instant asset write-off threshold amount
    • claim a tax deduction for the business portion of the purchase cost in the year the asset is first used or installed ready for use.

    Find out about:

    Small business pool

    Small businesses can:

    • pool the business portion of most higher cost assets (those with a cost equal to or more than the relevant instant asset write-off threshold) and claim    
      • a 15% deduction in the year you start to use them or have them installed ready for use (this percentage may increase to 57.5% for those assets eligible for the backing business incentive – accelerated depreciation)
      • a 30% deduction each year after the first year
       
    • deduct the balance of the small business pool at the end of the income year if the balance at that time (before applying the depreciation deductions) is less than the instant asset write-off threshold.

    For a worked example, refer to the Examples below.

    If you choose to use the simplified depreciation rules, you must:

    • use them to work out deductions for all your depreciating assets except those specifically excluded
    • apply the entire set of rules, not just individual elements (such as the instant asset write-off)
    • only claim a deduction for the portion of the asset used for business or other taxable purposes and not for the portion for private use.

    If you choose to stop using the simplified depreciation rules or become ineligible to use them, you must use the general depreciation rules. However, any assets in your small business pool will continue to be depreciated in the pool, even if you stop using the simplified depreciation rules.

    Next step:

    • Attend our depreciation webinar – which addresses commonly asked questions around claiming deductions and depreciating assets.

    See also:

    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 of a car that is designed mainly for carrying passengers is limited by the car limit. This means that the maximum that you can claim under the instant asset write-off (for this type of car is $57,581 for the 2019–20 income year.

    If you are registered for the goods and services tax (GST) and can claim the full GST credit, you exclude the GST amount you paid on the asset when you calculate your depreciation amounts (and your instant asset write-off threshold is exclusive of any GST).

    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 inclusive of any GST).

    If you are only able to claim a portion of the GST credit then the cost is reduced by the portion you can claim.

    See also:

    Trade-ins

    When you trade-in 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 two assets may appear as one transaction.

    There are two transactions, the purchase of a new asset and the disposal of an existing asset. If the purchase price of your asset (irrespective of the amount you were paid for your trade-in) is equal to or more than the relevant threshold, then it needs to be added to the small business pool and can't be immediately written-off.

    Business vs private use

    Your depreciation deduction is limited to the percentage your asset is used for business or other taxable purposes (for example, to manage your investments or rental properties). You cannot claim a deduction for the portion of the asset used for private purposes.

    In determining whether the instant asset write-off applies, you must take into account the full cost of the asset, but your deduction is limited to an estimate of how much you use the asset in earning assessable income.

    For example, if you buy a car for $19,000 and you estimate it is used 50% for business purposes and 50% for private purposes, it is immediately written-off, but your deduction is $9,500.

    Asset sales and disposals

    If an asset is part of the small business pool and you sell it (or it is lost or damaged and you receive a compensating insurance payout), the balance of the pool is reduced by the amount of the sale proceeds or insurance payout – to the extent the asset has been used and depreciated for taxable purposes.

    If an asset has previously been written-off (either under the instant asset write-off or as part of a low value pool), the proceeds from the sale of the asset must be added to your assessable income – to the extent the asset has been used and depreciated for taxable purposes.

    See also:

    Exclusions

    A small number of assets are excluded from the simplified depreciation rules.

    See also:

    Examples

    Example 1: Simplified depreciation – small business pool for 2018–19 income year

    Loretta buys a trailer for her event management business on 1 December 2018 for $15,000. She buys a second larger trailer on 2 February 2019 for $28,000. She also sells an old trailer that was previously in her small business pool for $8,000. Loretta has an opening pool balance of $100,000 from the previous year.

    Loretta will:

    • immediately write-off the cost of the first $15,000 trailer (as it is under the $20,000 instant asset write-off threshold which applied at the time she purchased and started to use the trailer)
    • calculate her depreciation deduction for pool assets by    
      • adding the cost of the $28,000 larger trailer to her small business pool (as it is over the $25,000 threshold which applied at the time she purchased and started to use the larger trailer).
      • deducting the $8,000 received from the sale of the old trailer from her small business pool.
       
    Calculation of small business pool balance for 2018–19 income year
    Calculation of small business pool balance for 2018–19 income year

    Calculation item

    Pool balance

    Depreciation claim

    Closing pool balance from previous year  

    $100,000

    Opening pool balance for current year   

    $100,000

    Add: New asset purchase 

    $28,000

    Subtotal

    $128,000

    Less: Proceeds of asset sale or disposal 

    $8,000

    Subtotal

    $120,000

    Pool deduction claim (30% of $100,000) 

    $30,000

    $30,000

    Subtotal

    $90,000

    New asset deduction claim (15% of $28,000) 

    $4,200

    $4,200

    Total depreciation for current year

    $34,200

    Closing pool balance

    $85,800 

    Loretta's depreciation claim for the 2018–19 income year is:

    • deduction for instant asset write-off: $15,000
    • deduction for small business pool: $34,200.

    Loretta's closing pool balance for the year is $85,800.

    Figures exclude GST.

    End of example

     

    Example 2: Simplified depreciation – small business pool for 2019–20 income year

    Loretta buys a new car to use for her business on 15 January 2020 for $33,000. The car is delivered on 31 January 2020. Loretta can't immediately write off the cost of the car as the threshold is $30,000 at the time she starts to use the car. She needs to allocate the car to her small business pool.

    Calculation of small business pool balance for 2019–20 income year

    Calculation item

    Pool balance

    Depreciation claim

    Closing pool balance from previous year

    $85,800

    -

    Opening pool balance for current year

    $85,800

    -

    Add: New asset purchase – car

    $33,000

    -

    Subtotal

    $118,800

    -

    Before applying the depreciation deductions, the balance of the pool at the end of income year is $118,800. From 12 March 2020, the instant asset write-off threshold increased to $150,000. As the balance of the pool is less than the threshold at the end of the income year, Loretta will write off the entire pool balance in her 2019–20 income tax return. 

    Loretta's closing pool balance for the year is $0.

    Figures exclude GST.

    End of example
    Last modified: 23 Jun 2020QC 33726