Small business entities
Recent changes to the law temporarily increase the threshold for assets that can be immediately written off from $1,000 to $20,000. This change applies to:
- assets that were first acquired at or after 7.30pm AEST of 12 May 2015, and
- first used or installed ready for use on or before 30 June 2017.
Assets that do not satisfy these timing requirements continue to be subject to the $1,000 threshold.
For more information, see Small business entity concessions.
You are eligible to be a small business entity for an income year if:
- you carry on a business in that year, and
- 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 each can be written off immediately
- other depreciating assets are pooled in a general small business pool and deducted at the 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.
- the threshold at which a small business can write-off the total balance of the general small business pool is aligned with the instant write-off threshold of $20,000.
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 relevant pool. If you choose not to use the simplified depreciation rules you cannot add any new assets to those pools. You can alternatively account for those assets under the UCA rules; see Small business entity concessions.
Certain start-up expenses immediately deductible
From the 2015–16 income year, certain start-up expenditure that would be deductible over five years under section 40-880 of the ITAA 1997 is fully deductible in the income year in which the expenditure is incurred.
Expenditure may be fully deductible in the income year incurred if:
- it relates to a small business that is proposed to be carried on
- it is incurred
- in obtaining advice or services relating to the proposed structure or the proposed operation of the business, or
- in payment to an Australian government agency of a fee, tax or charge relating to setting up the business or establishing its operating structure
- in that income year in which the deduction is claimed, the entity that incurred the expenditure
- is a small business entity, or
- does not carry on a business and does not control or is controlled by an entity carrying on a business in that income year that is not a small business entity in that income year.
Professional advice and services relating to the structure or the operations of the proposed business
Professional advice and services that may be deductible under this section include advice from a lawyer or accountant on how the business may be best structured as well as services such individuals or firms may provide in setting up legal arrangements or business systems for such structures. It does not include the cost of acquiring assets that may be used by the business. Similarly, advice and services in relation to the operation of the proposed business includes professional advice on the viability of the proposed business (including due diligence where an existing business is being purchased) and the development of a business plan.
Payments to Australian government agencies
Payments of taxes, fees or charges relating to the establishing the business or its structure to an Australian government agency may be immediately deducted under this section.
An Australian government agency is a Commonwealth, State or Territory government (or an authority of these). Local governments are included as an authority of the relevant State or Territory government.
Broadly, this category of expenditure includes regulatory costs incurred in setting up the new business. Examples include the costs associated with creating the entity that may operate the business (such as the fee for creating a company) and costs associated with transferring assets to the entity which is intended to carry on the proposed business (for example, the payment of stamp duty). It does not include expenditure relating to taxes of general application such as income tax. The payment of these general taxes does not relate to establishing a business or its structure but instead to the operation and activities of the businesses. Such general taxes are also not normally deductible under section 40-880.
Immediate deductibility is also limited to expenditure by certain entities, with the effect of excluding expenditure incurred by larger businesses.
If the claimant entity carries on a business in the income year, it must itself be a small business entity which is broadly defined under tax law as an entity with an aggregate annual turnover of less than $2 million.
Alternatively, if this entity does not carry on a business in the income year it must not be connected with or be an affiliate an entity that carries on a business in the income year that is not a small business entity.
Example of start-up expense which can be immediately deducted
Winston Co is a company that is as a small business entity and is in the process of setting up a florist business, to be operated by a separate entity. Winston Co is uncertain as to the best location for the proposed business. Winston Co obtains advice from a consultant in order to assist in determining a suitable location. These amendments will apply to the cost of obtaining this advice, allowing it to be fully deducted in the income year in which it is incurred.
Example of capital expenditure which cannot be immediately deducted
Percy already carries on an established small landscaping business. As part of plans to expand and improve his business Percy obtains financial advice about financing the expansion. As Percy’s business is already established the subsection 40-880(2A) of the ITAA 1997 deductions will not apply.
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, and
- 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 7.30 PM AEST on 13 May 2008 or otherwise started to hold it after that day) or
- five years (if the in-house software is first used or first installed ready for use on or after 1 July 2015)
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:
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.