The Ultimate Small Business Depreciation Guide

The Ultimate Guide to Simplified Depreciation Rules for Small Businesses

One of the ways in which you can maximise the tax deductions for your small business is through the simplified small business depreciation rules offered by the Australian Tax Office.

Understanding the expensing rules related to tax incentives for asset purchases is crucial, especially when considering measures like the temporary full expensing and 50% backing business investment incentive.

But what is small business depreciation? How do you know if you qualify? And how is the Australian Government helping small businesses through the economic hardship caused by COVID-19?

Don’t worry; we’ve got all your questions covered!

We’ve put together this ultimate guide to the simplified depreciation rules to help your small business save thousands of dollars.

What Is Small Business Depreciation?

As a commercial building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.

The Australian Tax Office (ATO) allows business owners and property investors, who generate income from their properties, to claim the depreciation as a tax deduction.

To simplify the process of claiming tax deductions, the ATO introduced simplified depreciation rules for small businesses. So, a small business can choose to use either the simplified depreciation rules or the general depreciation rules, depending on what best suits its circumstances.

Before delving into the simplified small business depreciation rules, it’s essential to determine whether your business qualifies as a “small business entity”.

What Qualifies as a Small Business Entity?

Whether a business is considered a small entity or not, is dependent on its annual aggregated turnover. 

To access the simplified depreciation rules, the business must have an annual aggregated turnover of: 

• $10 million (from 1 July 2016 onwards); or 
• $2 million for the previous income years. 

Choosing the Simplified Small Business Depreciation Rules

Suppose you’ve determined that your business is a small business entity and that you would prefer using the simplified depreciation rules. If that is the case, there are a few factors that you need to consider.

If you are a small business that chooses to go the simplified route, you must be aware that you’ll be required to:

• apply the rules to all your business’s depreciable assets (except for those that the ATO specifically excludes);
• apply the entire set of rules, not just ones you deem appropriate; and
• only claim depreciation deductions for the portion of the asset that’s used to carry out your business. In other words, you can’t claim a depreciation deduction on the portion of the asset that you use privately.

What Are the Simplified Depreciation Rules? 

The simplified small business depreciation rules include:

1. Instant asset write off; and
2. general small business pool.

Temporary full expensing is a recent tax depreciation incentive available to eligible businesses. This measure allows businesses to immediately deduct the business portion of the cost of eligible depreciating assets. It interacts with the simplified depreciation rules by suspending the ‘lock out’ rules and is available for assets first used or installed after a specific date.

What Does “Instant Asset Write-off” Entail for Small Business Entities?

Under this rule, you can immediately claim a small business deduction for the cost of the business-use portion of an asset, in the same year that you first used or installed it.

The instant asset write-off can be used for a variety of new and second-hand assets, provided that the cost of each asset is less than the relevant threshold.

The threshold has changed numerous times over the past few years.

In response to the effects of the global coronavirus pandemic, the ATO made the following changes to the instant asset write-off. From 12 March 2020 until 31 December 2020:

• The threshold amount for each depreciating asset had increased from $30,000 to $150,000, and
• The eligibility criteria had been expanded to cover businesses with an annual aggregated turnover of less than $500 million, up from $50 million.

Since then, however, the Australian Government has further extended the Instant Asset Write-Off Scheme.  The updated scheme has been effective since 7:30 pm on 6 October 2020 and will apply until 30 June 2022:

• businesses with an aggregated annual turnover of up to $5 billion can now immediately claim a depreciation deduction for eligible assets as well as the full cost of improvements to existing assets, and
• the total cost of the asset can be claimed,  so there is no threshold amount.

This means that until 30 June 2022, this limitless instant asset write-off scheme overrode all previous schemes.

Note: And as of 2024, the limitless instant asset write off has not been extended or modified for the 23-24 financial years.

The following table reflects the various changes made to the instant-write off threshold from 7:30 pm on 12 May 2015:

General Small Business Pool

According to the small business pool simplified depreciation rule, business owners can claim depreciation deductions on plant and equipment assets at an accelerated rate.

In other words, small businesses can pool the higher-costing business-use assets and claim:

• a 15% deduction in the year that you started using the asset or installed it ready to be used; and
• a 30% deduction each year after the first year.

The ATO proposes that higher-cost assets are generally those that cost more than or equal to the relevant instant asset write-off threshold.

In addition, small businesses can deduct the entire balance of the pool at the end of the income year if the balance (before applying the depreciation deductions) is less than the instant asset write-off threshold.

Note: while the limitless instant asset write-off is in effect, the small business pool is only used for businesses with turnover over $5 billion per year.  

Example:

Jules purchased a food truck on 4 January 2020 for $63,000. Her truck is ready to use by 12 January 2020.  In addition to her food truck, she also purchased several higher-priced assets allocated to her small business pool, including her commercial ovens and refrigerators for her food truck. 

At the end of the 2023– 24 financial year, her small business pool totalled to $125,000. 

Because Jule’s assets total to higher than the threshold, which was $30,000 at the time, she does not qualify for an instant asset write-off. 

And as it is a new asset for business purposes, she qualifies for a 15% deduction. 

Her small business depreciation deduction calculation is as follows: 

$125,000 x 15% = $18,750

Jules can claim a depreciation tax deduction for $18,750. 

What About the Backing Business Investment Incentive (BBI)?

To support business investment and economic growth during the COVID-19 pandemic, the ATO also introduced the BBI Incentive.

The incentive, available from 12 March 2020 to 30 June 2021, allows for accelerated depreciation deductions for businesses with an annual aggregated turnover below $500 million with new (first-held) depreciating assets.

Businesses using the small business depreciation rules can claim 57.5% of the asset’s total cost in the first year of its use. It can then be added to the general small business pool in which the depreciation deduction will be calculated at 30% for the following years. Compared to the BBI incentive, the temporary full expensing rules offer broader benefits, including for second-hand assets and without the pre-commitment exclusion.

Key Takeaways 

The ATO has simplified depreciation rules for small businesses so that they can maximise their cash flow each financial year. 

 The simplified small business depreciation rules apply to eligible small business entities and include: 

• the instant asset write off; and 
• the general small business pool.

In attempts to soften the economic hardship caused by the global coronavirus pandemic, the Australian Government made amendments to the instant asset write-off to cover a broader range of businesses. In addition, they introduced the BBI Incentive to accelerate depreciation deductions for small business pools. 

As a small business, you should ensure that you are taking advantage of the simplified depreciation rules as this is a significant tax-deductible expense. 

If you are feeling unsure about the small business depreciation rules, you may find it helpful to purchase a tax depreciation schedule.

A tax depreciation schedule is a report that outlines the depreciation deductions available for small business assets for tax purposes.

At Duo Tax, our team of quantity surveyors are small business and investment tax experts who can provide you with a depreciation schedule that will not only break down your claimable small business depreciation deductions but will also save you thousands of dollars in tax each year.

To receive a free estimate on your small business depreciation, or to request a sample report, get in touch with us today!