Your Guide to Small Business Depreciation
Running your own small business is hard work, but it is also very rewarding and satisfying. However, when it comes to things like tax, write-offs and depreciation, things can get a little tricky and sometimes you may need the help of your small business accountant.
But that doesn’t mean you can’t take a read of our handy guide to assist! We have put together a range of information to help you decipher small business depreciation and how it may apply to your business. If you’d like further information, give Bottom Line Control a call on (07) 5471 7077 and our friendly team would be happy to assist.
*Please note, this guide is broad in nature and may not suit your exact circumstances. Always speak to a professional when it comes to individual and business taxation matters before making any decisions.
What is a small business?
According to the ATO, from 1 July 2016 you are a small business entity if you are a sole trader, partnership, company or trust that:
- Operates a business for all or part of the income year; and
- Has an aggregated turnover that is less than $10 million (the turnover threshold).
For previous income years before 1 July 2016, you are a small business if your turnover is less than $2 million.
What is depreciation?
Depreciation is the reduction in value of an asset over time, due particularly to wear and tear.
What about the simplified depreciation rules?
The simplified depreciation rules apply to small businesses who wish to write-off particular assets that cost less than the designated threshold amount, which are purchased and used/installed and ready to use in the same year they are being claimed.
Who can use the simplified depreciation rules?
You can elect to use the simplified depreciation rules if you are a small business with an aggregated turnover (the total normal income of your business and that of any associated businesses) of less than:
- $10 million from 1 July 2016 onwards.
- $2 million for previous income years.
Additionally, if your business has an aggregated turnover of $10 million to $50 million, you can claim instant tax write-offs too from 7.30pm on 2 April 2019. Head to the ATO website for more information.
What assets can I write off?
Assets must meet the following criteria:
- The entire cost of the asset must be below the relevant threshold.
- The asset can be used or new, it doesn't matter.
- The asset that you are writing off must have been first used or installed/ready to be used in the same income year that it is being claimed in.
Asset cost thresholds
The asset cost thresholds, also called instant asset write-off thresholds, are as follows:
The threshold from 1 January 2014 to 7.30pm on 12 May 2015 is $1,000.00, from 1 July 2012 to 31 December 2013 is it $6,500.00 and from 1 July 2011 to 30 June 2012 it is $1,000.00.
The threshold will go back to $1,000.00 from 1 July 2020.
Read further in relation to the instant write-off thresholds from the ATO here.
How do you calculate the cost of an asset?
When looking at how much an asset costs, the amount includes:
- The amount you paid for the asset.
- Any additional amount you spent on transporting and/or installing the asset.
What about GST?
If you are registered for GST and can claim the full GST credit, you can remove the GST you paid on the asset when you are figuring out depreciation amounts and the instant write-off threshold excludes GST.
If you are not registered for GST, the cost of the asset includes GST and the instant write-off threshold includes GST.
If you can only claim a portion of the GST credit, then the cost of the asset only includes the portion of GST you can not claim and the instant threshold only includes the portion of GST you can not claim as well.
Can I claim multiple assets under the threshold?
Yes! You can claim multiple assets as long as they meet the relevant criteria. Additionally, the accumulated value of all assets can be more than the relevant threshold amount, as long as every asset in its own right is under the relevant threshold amount.
What about purchases over the threshold?
Purchases that are over the relevant threshold will be placed in the small business pool.
What is the small business pool?
If you have an asset and it is the same cost, or higher, than the applicable threshold, that asset must be placed into the small business pool.
The small business pool a list of all your depreciable assets with their current written down values.
What applies to the small business pool?
There are a few things that you can do with your small business pool:
- Claim a 15% deduction in the year that the assets start to be used or are installed ready to be used.
- Claim a 30% deduction every year following the first year.
- A deduction can be made for 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.
Low small business pool asset value
Following on from the last point above, if the adjustments listed below are completed and the small business pool balance is less than the relevant instant asset write-off threshold, the small business pool asset balance must be written off. The amount is then to be claimed as a depreciation deduction using the following steps:
- Commence with the opening balance applicable to the current year.
- Add the adjustable value of assets that have been acquired and first used in the current year.
- Add the taxable proportion of cost additions to the pool in the current year.
- Minus the taxable purpose proportion of proceeds (including insurance payouts) of any assets disposed of in the current year.
If the small business pool value is lower than the relevant instant asset write-off threshold, the pool depreciates by this amount and its closing balance for the year becomes zero
For an example of an instant write-off due to the balance being under the threshold, head to the ATO website here.
What about trading in an asset?
When you trade in an asset, for example a car, the price is usually the cost of the asset minus the trade-in price and it is treated as one ‘transaction’. In reality however it is two transactions - the disposal of one asset and the purchase of another.
In relation to the simplified depreciation rules, the cost of an asset in relation to a trade-in is the purchase price of the asset - no consideration is given to any trade-in amount that may have been taken off. For example, if you trade-in a car for $7,000.00 and purchase another car with a price of $35,000.00, even though you only pay $28,000.00, the price of the asset is $35,000.00 and therefore over any threshold amount. This means it will go into the small business pool and can not be instantly written-off.
How does simplified depreciation affect your small business?
There are a range of ways in which simplified depreciation affects your business:
- Assists in ensuring cash flow remains positive.
- Assists in allowing small businesses to make essential larger purchases.
- Allows you to claim assets this financial year instead of waiting until the following year.
Things to remember about the simplified depreciation rules
- If you are using the simplified depreciation rules, you must apply all the rules, not just parts of them e.g. only apply the instant write-off and nothing else.
- You must use the simplified depreciation rules for all your assets unless they are specifically excluded.
- You can only claim deductions for the portions of assets that are used for business/other taxable purposes, not for private use. For example, if you purchase a vehicle for $22,000.00, and you estimate it is used 75% for business and 25% for private purposes, it is immediately written-off but your deduction is $16,500.00.
FAQs
If you instantly write off an asset, can you claim depreciation?
No you can’t. You can not claim depreciation in the years following that have been instantly written off.
Can you purchase a vehicle and then instantly write it off?
Yes. You can buy a car and write it off, as long as it is less than the relevant threshold amount.
What happens to your small business pool if you stop using the simplified depreciation rules or become ineligible?
If you stop using the simplified depreciation rules, or become ineligible to use them and must use the general depreciation rules, any assets in your small business pool will continue to be depreciated in the pool.
What happens if you sell an asset in your small business pool?
If you sell an asset that is contained within your small business pool, or an asset is lost/damaged and you receive an insurance payout, the balance of the pool is reduced by the sale amount/insurance payout – to the extent the asset has been used and depreciated for taxable purposes.
If 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. - ATO
If you would like more information regarding small business depreciation and if it is applicable to your circumstances, give Bottom Line Control a call on (07) 5471 7077 and our qualified team would be happy to assist.
Resources:
Australian Government - Australian Taxation Office (Simpler depreciation for small business): https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/simpler-depreciation-for-small-business/
Australian Government - Australian Taxation Office (Pooling and depreciating assets costing more than the threshold): https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/In-detail/Depreciating-assets/Simplified-depreciation---rules-and-calculations/?page=5
Australian Government - Australian Taxation Office (Simplified depreciation - rules and calculations): https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/in-detail/depreciating-assets/simplified-depreciation---rules-and-calculations/
Australian Government - Australian Taxation Office (Small business eligibility): https://www.ato.gov.au/business/small-business-entity-concessions/eligibility/
Australian Government - Australian Taxation Office (General depreciation rules - capital allowances): https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/General-depreciation-rules---capital-allowances/
Australian Government - Federal Register of Legislation (Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019): https://www.legislation.gov.au/Details/C2019B00024/Explanatory%20Memorandum/Text
*Please note, this is a guide only and should be treated as such. You should always complete extensive research yourself and also obtain professional advice when it comes to small business depreciation matters, as every set of circumstances is different and the information contained above may not be applicable to your needs.
