House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Chapter 7: $20,000 instant asset write-off for small business entities

Outline of chapter

7.1 Schedule 7 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. This will allow small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use for a taxable purpose on or before 30 June 2025. The extension will improve cash flow and reduce compliance costs for small businesses.

Context of amendments

Small business entities

7.2 Division 328 of the ITAA 1997 provides a range of income tax concessions for small business entities, including access to the simplified depreciation rules (see Subdivision 328-D). Under section 328-110, an entity is a small business entity for an income year if the entity carries on a business in that year and either:

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the entity carried on a business in the prior income year and its aggregated turnover was less than a threshold amount; or

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the aggregated turnover of the entity in the current income year is likely to be less than that threshold.

7.3 The threshold for 2016-17 and later income years is $10 million.

$20,000 instant asset write-off for small business entities

7.4 The instant asset write-off supports small businesses by allowing eligible depreciating assets each costing less than a threshold amount to be immediately deducted. Immediate deductibility reduces the compliance costs associated with business investment as the depreciation of eligible assets does not need to be tracked over time. It also improves cash flow by bringing forward deductions from future years. Small businesses tend to be more vulnerable to cash flow problems than larger businesses as their profitability tends to be more volatile.

7.5 The ongoing legislated threshold below which eligible amounts can be immediately deducted is $1,000 (see section 328-180 of the ITAA 1997). However, the threshold has been temporarily increased over recent years.

7.6 The Government announced in the 2023-24 Budget that it will support small businesses by temporarily increasing the instant asset write-off threshold to $20,000, from 1 July 2023 until 30 June 2024.

7.7 The Government announced in the 2024-25 Budget that it will support small businesses by extending the $20,000 instant asset write-off by 12 months until 30 June 2025.

Summary of new law

7.8 Schedule 7 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. The $20,000 asset threshold applies to the cost of eligible depreciating assets, eligible amounts included in the second element of the cost of a depreciating asset, and general small business pools, until 30 June 2025.

7.9 Schedule 7 to the Bill also extends the deferral of the 'lock-out' rule for small businesses that previously opted out of the simplified depreciation rules to 30 June 2025.

7.10 Without the amendments, the asset threshold would revert to the ongoing legislated threshold of $1,000 from 1 July 2024.

Detailed explanation of new law

7.11 The $20,000 threshold that applies to the cost of depreciating assets, amounts included in the second element of a depreciating asset's cost, and the low pool value deduction under the simplified depreciation rules applies until 30 June 2025. Deductions for depreciating assets

7.12 A small business entity that has elected to use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997 for an income year may immediately deduct or 'write off' the taxable purpose proportion of the cost of an asset acquired for less than a threshold amount.

7.13 The 'taxable purpose proportion' of a depreciating asset is defined in subsection 328-205(3) of the ITAA 1997 and in general terms represents the proportion of an asset's use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than the threshold is claimed in the income year in which the asset is first used or installed ready for use for a taxable purpose.

7.14 The ongoing legislated threshold is $1,000. The amendments in Schedule 7 to the Bill build on the 2023-24 Budget announcement. That announcement was to increase the instant asset write-off threshold to $20,000 from 1 July 2023 until 30 June 2024.

7.15 The amendments implement the 2024-25 Budget announcement by extending the $20,000 threshold by 12 months until 30 June 2025. That means the $20,000 threshold applies to depreciating assets first used or installed ready for use for a taxable purpose on or before 30 June 2025. [Schedule 7, item 3, paragraph 328-180(4)(d) of the IT(TP) Act]

7.16 A consequential change is made to the heading to section 328-180 of the IT(TP) Act to reflect the increased threshold end date of 30 June 2025. [Schedule 7, item 1, the heading to section 328-180 of the IT(TP) Act]

Deductions for amounts included in the second element of the cost of depreciating assets

7.17 A small business entity can also immediately deduct an amount included in the second element of a depreciating asset's cost (for example, an amount spent on improving or transporting a depreciating asset), provided the amount is:

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less than the threshold;

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the first such amount to be deducted in respect of the asset; and

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the asset was written off (its cost was fully deducted) in a previous income year.

7.18 The ongoing legislated threshold is $1,000. The amendments extend the $20,000 threshold for 12 months until 30 June 2025. That means an amount included in the second element of cost must be less than $20,000 and included in the second element of cost on or before 30 June 2025. [Schedule 7, item 4, subparagraph 328-180(5)(e)(ii) of the IT(TP) Act]

Example 7.1

Thomas, a bricklayer, is a small business entity and has elected to use the simplified depreciation rules.

Assets below the threshold

On 1 September 2024, Thomas purchases a tablet for $4,000 to be used 100 per cent for business purposes. Thomas can use the instant asset write-off to immediately deduct the full cost of the tablet as it is below the asset threshold of $20,000.

Assets exceeding the threshold

On 1 December 2024, Thomas purchases a ute for $50,000. He estimates he will use the ute 50 per cent of the time for his business, and 50 per cent for private purposes.

Thomas cannot use the instant asset write-off as the total cost of the ute ($50,000) exceeds the asset threshold of $20,000.

Instead, the $25,000 taxable purpose proportion of the cost of the ute ($50,000 multiplied by 50 per cent) is allocated to Thomas' general small business pool. Thomas can claim a deduction of $3,750 (15 per cent multiplied by $25,000) in his 2024-25 income tax return. Deductions for later income years will be calculated as 30 per cent of the opening pool balance of Thomas' general small business pool.

Amounts included in the second element of cost of an asset

Thomas used the instant asset write-off to immediately deduct the cost of a cement mixer that is used 100 per cent for business purposes in a prior income year. On 1 March 2025, Thomas incurs a cost of $400 to improve the asset. This is the first amount included in the second element of the cost of the asset.

Thomas can claim an immediate deduction for the full amount included in the second element of the asset's cost ($400 improvement) under the instant asset write-off.

However, if Thomas subsequently includes another amount in the second element of the cost of the asset, that expenditure will instead be allocated to Thomas' general small business pool.

Deductions for low pool values

7.19 A small business entity can also deduct the balance of its 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 a threshold amount. For this purpose, the balance of the pool is determined prior to calculating any deductions in respect of the pool for the income year.

7.20 The ongoing legislated threshold is $1,000. The amendments extend the $20,000 threshold until 30 June 2025. That means if the balance of a small business entity's general small business pool is less than $20,000 at the end of an income year that ends in the relevant period on or before 30 June 2025, the entity can claim a deduction for the entire balance of the pool in that income year. [Schedule 7, item 4, subparagraph 328-180(6)(e)(ii) of the IT(TP) Act]

Deferral of five year 'lock-out' rule

7.21 A small business entity that elects to apply the simplified depreciation rules in an income year, and then does not choose to apply the rules for a later income year in which the entity satisfies the conditions to make this choice (that is, the entity 'opted out'), is not able to apply the simplified depreciation rules for a period of five income years. This restriction commences from the first of the later years for which the entity could have made the choice to apply the rules. This rule is commonly referred to as the 'lock-out' rule.

7.22 The operation of the lock-out rule has been modified over recent years so that small business entities did not need to apply the lock-out rule to income years if any day in the year occurs on or after 12 May 2015 and on or before 30 June 2024 (referred to as the 'increased access years').

7.23 The amendments suspend the operation of the lock-out rule for a further 12 months to 30 June 2025. As a result of this suspension, small businesses that had opted out can choose to apply the small business simplified depreciation rules and take advantage of the $20,000 threshold. [Schedule 7, item 2, paragraph (b) of the definition of 'increased access year' in subsection 328-180(1) of the IT(TP) Act]

Commencement, application, and transitional provisions

7.24 Schedule 7 to the Bill commences on the later of:

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the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives the Royal Assent; and

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immediately after the commencement of Schedule 1 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024.

7.25 However, Schedule 7 to the Bill does not commence at all if Schedule 1 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024 does not commence.

7.26 Subject to the timing of the passage of the Bill, the amendments may apply retrospectively. The changes are wholly beneficial to entities affected by the amendments.