Simpler depreciation for small business
Simplified depreciation rules including instant asset write-off and the small business pool.
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Simplified depreciation rules
You can choose to use the simplified depreciation rules if you have a small business with an aggregated turnover of less than:
- $10 million from 1 July 2016 onwards
- $2 million for previous income years.
Aggregated turnover is based on the income of your business and that of any associated businesses.
Simplified depreciation rules for small business include:
- an instant asset write-off for assets that cost less than the relevant threshold (which is supplemented with the temporary full expensing from 7.30pm AEDT on 6 October 2020 to 30 June 2023)
- a general small business pool, which has simplified calculations to work out the depreciation deduction.
There are three temporary tax depreciation incentives available to eligible businesses – temporary full expensing, the increased instant asset write-off and backing business investment.
We have prepared a high-level snapshot to help you work out how the temporary tax depreciation incentives may apply to you. Refer to Interaction of tax depreciation incentives.
Instant asset write-off
Under instant asset write-off, eligible businesses:
- can immediately write off the cost of each asset that costs less than the relevant threshold amount
- claim a tax deduction for the business portion of the cost in the year the asset is first used or installed ready for use.
Note: 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. These businesses must immediately deduct the business portion of the asset's cost under temporary full expensing.
Small business pool
If your income years end between 6 October 2020 and 30 June 2023, you must deduct the balance of the small business pool under temporary full expensing at the end of the income year.
For your income years ending before 6 October 2020, you:
- 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
- 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.
If an asset is eligible for backing business investment – accelerated depreciation and costs $150,000 or more, you pool the business portion of that asset and claim:
- a 57.5% deduction in the year you start to use the asset, or have it installed ready for use
- a 30% deduction each year after the first year.
Using simplified depreciation
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.
A small number of assets are excluded from the simplified depreciation rules and a car limit applies to the cost of passenger vehicles.
If you stop using simplified depreciation
If you choose to stop using the simplified depreciation rules or become ineligible to use them, you can work out deductions for your depreciating assets using:
- temporary full expensing for assets you purchased, and first use (or have installed ready for use) for a taxable purpose from 7.30pm AEDT on 6 October 2020 to 30 June 2023.
- backing business investment – accelerated depreciation rules or the general depreciation rules.
For depreciating assets in your small business pool where the income year ends before 6 October 2020:
- continue to claim a 30% deduction each year until the pool balance falls below the instant asset write-off threshold
- then deduct the remaining pool balance.
- add more assets to the pool
- claim an instant asset write-off for any new assets under these rules.
You deduct the balance of your small business pool at the end of an income year ending between 6 October 2020 and 30 June 2023.
To notify the Commissioner of your choice, lodge your tax return and keep your records for the required period of time. You are not required to lodge any other form to notify of your choice.
Lock out rules
From 7.30pm AEST 12 May 2015 to 30 June 2023 the ‘lock out’ rules are suspended to allow small businesses that have chosen to stop using the simplified depreciation rules to take advantage of temporary full expensing and the instant asset write-off.
Previously, the 'lock out' rules prevented small businesses from re-entering the simplified depreciation system for five years if they had opted out.
Using simplified depreciation rules again
If you have stopped using the simplified depreciation rules, and then start using them again, you must adjust the opening pool balance for any depreciating assets that you have started using or installed ready for use since last using these rules.
Your new opening pool balance will be your previous closing balance plus the business portion of the value of any depreciating assets not previously added to the pool.
Bookkeeping and record keeping
Modern bookkeeping systems generally calculate depreciation, but make sure you have chosen the right settings to apply the simplified depreciation rules.
In line with the record-keeping requirements for taxpayers generally, you must keep records for 5 years of:
Simplified depreciation rules including instant asset write-off for small businesses with an aggregated turnover of less than $10 million from 1 July 2016.
- how you worked out your opening pool balance
- any change in how much you use the asset in your business
- any assets you dispose of.