Simplified depreciation for small business
You can choose to use the simplified depreciation rules if you have a small business with an aggregated annual turnover (the total normal income of your business and that of any associated businesses) of less than $2 million.
Under these rules, you:
- immediately write-off – deduct their full cost in the year you buy them – most depreciating assets that cost less than $20,000* each that were acquired and installed ready for use from 7.30pm (AEST) on 12 May 2015 until 30 June 2017
- pool most other depreciating assets that cost $20,000 or more in a small business asset pool and claim
- a 15% deduction in the first year (regardless of when you purchased or acquired them during the year)
- a 30% deduction each year after the first year
- write-off the balance of your small business pool at the end of an income year if the balance – before applying any other depreciation deduction – is less than $20,000.
* The current instant asset write-off threshold is $20,000. It has changed over the last few years (see Instant asset write-off).
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, and
- apply the entire set of rules, not just individual elements (such as the instant asset write-off).
You can choose to stop using the simplified depreciation rules or become ineligible to use them, in which case you’ll then 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.
On this page:
- Business vs private use
- Asset sales and disposals
- Example: simplified depreciation – small business pool
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.
If you are registered for the goods and services tax (GST), you exclude the GST amount you paid on the asset when you calculate your depreciation amounts (and your instant asset write-off threshold is $20,000 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 $20,000 inclusive of any GST).
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 generally appear as one transaction.
However, for the purpose of the simplified depreciation rules, the transactions are considered separate. If the purchase price of your asset (irrespective of the amount you were paid for your trade-in) is $20,000 or more, it needs to be added to the small business pool and can’t be immediately written-off.
Your depreciation deduction is limited to the percentage your asset is used for business or other taxable purposes.
This means that in determining whether the instant asset write-off applies, you 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 can be immediately written-off but your deduction is $9,500.
Where 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.
Where 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 asset’s sale must be added to your assessable income – to the extent the asset has been used and depreciated for taxable purposes.
A small number of assets are excluded from the simplified depreciation rules.
For her event management business, Loretta bought a trailer on 1 December 2015 for $15,000 and a second larger trailer on 2 February 2016 for $28,000. She also sold an old trailer that was previously in her small business pool for $8,000. Loretta had an opening pool balance of $100,000 from the previous year.
- immediately write off the cost of the first $15,000 trailer (as it is under the $20,000 instant asset write-off threshold)
- calculate her depreciation deduction for pool assets by:
- adding the cost of the $28,000 trailer to her small business pool (as it is over the $20,000 threshold)
- deduct the $8,000 received from the sale of the old trailer from her small business pool.
|Calculation of small business pool balance||Depreciation claim|
|Closing pool balance from previous year||$100,000|
|Opening pool balance for current year||$100,000|
|New asset purchase||$28,000|
|Proceeds of asset sale or disposal||$8,000|
|Pool deduction claim (30% of $100,000)||$30,000||$30,000|
|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 2015-16 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.
Source: The Australian Tax Office
If you are looking for better service from more accessible business advisors who truly know you and your business, then click here to get in touch. We can arrange an obligation free meeting at our office or yours to discuss your situation. We look forward to being of assistance to you.
Whilst the Information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact on the accuracy of the Information. The Information may change without notice and BTACS is not in any way liable for the accuracy of any information printed and stored or in any way interpreted and used by a user. Always check with ATO on www.ato.gov.au for the latest changes on tax law.