Small business entities
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New laws have passed that allow small businesses with an aggregate turnover of less than $2 million to claim an immediate deduction for depreciating assets they acquire and start to use or install ready for use, provided the asset costs less than $20,000. The general small business pool will apply to depreciating assets costing $20,000 or more. The measure will apply to assets acquired from 7.30pm (AEST) on 12 May 2015 until 30 June 2017.
You are eligible to be a small business entity for an income year if:
- you carry on a business in that year
- you have an aggregated turnover of less than $2 million.
Similarly to the previous grouping rules that existed under the former simplified tax system, the new aggregation rules use the concepts of ‘connected with’ (which is based on control) and ‘affiliates’ to determine whether the turnover of any related businesses need to be included in the aggregated turnover of your business.
It is not necessary to specifically elect to be an eligible small business each year in order to access the concessions. However, you must assess your eligibility for the concessions each year.
Simplified depreciation rules
If you are an eligible small business you may choose to calculate deductions for your depreciating assets using these rules.
In general, the taxable purpose proportions of the adjustable values and second element of cost amounts of most:
- depreciating assets costing less than $20,000 (including second element of the cost) if purchased from 7.30pm (AEST) 12 May 2015, can be written off immediately.
- Depreciating assets costing less than $1,000 can be written off immediately if purchased from 1 January 2014 and before 7.30pm (AEST) 12 May 2015.
- other depreciating assets that cannot be immediately written off, are pooled in a general small business pool and deducted thereafter at the diminishing value rate of 30%
- newly acquired assets are deducted at 15% (half the pool rate) in the first year, regardless of when they were acquired during the year.
- You also deduct the balance of your general small business pool at the end of an income year if the balance of the pool at the end of the year is less than $20,000. The balance of the pool is determined prior to calculating any deductions in respect of the pool (that is, the closing balance before depreciation).
- The taxable purpose proportion is your reasonable estimate of the proportion you will use, or have installed ready for use, a particular depreciating asset for a taxable purpose.
If you are eligible, and choose to continue to use the simplified depreciation rules, you will continue to include any new depreciating assets in the general small business pool. If you choose not to use the simplified depreciation rules you cannot add any new assets to the general small business pool. You can alternatively account for those assets under the UCA rules. See Small business entity concessions.
- If a small business chooses to stop using the simplified depreciation rules, they cannot choose to use them again until at least five years after the income year they chose to stop using them. The current 'lock out' laws will be suspended from 7.30pm (AEST) 12 May 2015 until 30 June 2017 to enable small businesses which had previously opted out of using the simplified depreciation rules, to take advantage of the increased threshold for the instant asset write-off.
Special motor vehicle depreciation rules
From 1 January 2014, the accelerated depreciation deduction for motor vehicles no longer applies for vehicles purchased for $1,000 or more. Eligible motor vehicles costing less than the threshold can be written off under the instant asset write-off rules. Eligible motor vehicles costing more than the threshold, will need to be depreciated as part of the general small business pool at a rate of 15% in the first year and then at the diminishing value rate of 30% thereafter.
An eligible motor vehicle is generally any motor-powered road vehicle (including four wheel drive vehicles). However, it does not include road vehicles that are not used on public roads, or only travel on public roads as a secondary function to their main use. An eligible motor vehicle can be purchased new or second hand.
Assets for which deductions are claimed under the UCA
For some depreciating assets, deductions must be claimed under the UCA rather than under the simplified depreciation rules:
- assets that are leased out, or are expected to be leased out, for more than 50% of the time on a depreciating asset lease*
- assets allocated to a low-value or a common-rate pool before you started to use the simplified depreciation rules (those assets must remain in the pool and deductions must be claimed under the UCA)
- horticultural plants
- in-house software where the development expenditure is allocated to a software development pool. See Software development pools.
This does not apply to depreciating assets subject to hire purchase agreements, or short-term hire agreements on an intermittent hourly, daily, weekly or monthly basis where there is no substantial continuity of hiring.
Depreciating assets used in rental properties are generally excluded from the simplified depreciation rules on the basis that they are subject to a depreciating asset lease.
Capital expenditure deductible under the UCA
As the simplified depreciation rules apply only to depreciating assets, certain capital expenditure incurred by a small business entity that does not form part of the cost of a depreciating asset may be deducted under the UCA rules for deducting capital expenditure.
This includes capital expenditure on certain business related costs and amounts directly connected with a project. See Capital expenditure deductible under the UCA.
Under the UCA, you can choose to allocate to a software development pool expenditure you incur in developing (or having another entity develop) in-house software you intend to use solely for a taxable purpose. Once you allocate expenditure on such software to a pool, you must allocate all such expenditure incurred thereafter (in that year or in a later year) to a pool; see Software development pools.
If you have allocated such expenditure to a software development pool either before or since using the simplified depreciation rules, you must continue to allocate such expenditure to a software development pool and calculate your deductions under the UCA.
- have not previously allocated such expenditure to a software development pool and you choose not to do so this year, or
- incur the expenditure in developing in-house software that you do not intend using solely for a taxable purpose
then you can capitalise it into the cost of the unit of software developed and claim deductions for the unit of in-house software under the simplified depreciation rules when you start to use it (or install it ready for use) for a taxable purpose. Its decline in value can then be worked out using an effective life of four years (if you started to hold the in-house software under a contract entered into after 7.30pm AEST on 13 May 2008 or otherwise started to hold it after that day) and the prime cost method.
Deductions for in-house software acquired off the shelf by a small business entity for use in their business are available under the simplified depreciation rules. For example, such an item costing less than $1,000 will qualify for an outright deduction.
A small business entity can choose to claim deductions under either the simplified depreciation rules or the UCA for certain depreciating assets used in the course of carrying on a business of primary production. The choice is available for water facilities and for depreciating assets relating to landcare operations, electricity connections and phone lines.
You can choose to claim your deductions under the simplified depreciation rules or the UCA for each depreciating asset. Once you have made the choice, it cannot be changed.
Last modified: 20 Nov 2015QC 44162