Depreciation for small business – How the new depreciation rules work
Depreciation for small business can be complex. New laws now allow businesses to fully claim the cost of new assets in the year the assets are first used, rather than having to claim the cost over several years.
Benefits and Impacts of the Rules
The rules reduce the tax a business has to pay in the year the asset is purchased and first used compared with prior rules because the full cost of the asset is now claimed as an expense in the Profit and Loss Statement in the year of purchase and first use.
Previously, the full cost of the asset would be partially claimed over several years. until the asset was ‘fully written-off’. The tax saving was smaller each year (although the same in total) and was received every year until the asset was fully written off.
Example
An example of the impact of the change for the first two years of holding an asset is below, for an asset that costs $50,000 and that would previously have been depreciated under the ‘small business entity pool’ rules.
| Asset cost of $50,000 | New rules | Old rules with no ‘instant asset write-off’ |
| Amount claimed as expense in Profit and Loss statement – year 1 | $50,000 | $7,500 |
| Tax reduction due to the claim for a company in year 1 | $13,000 | $1,950 |
| Amount claimed as expense in Profit and Loss statement – year 2 | Not applicable as already fully claimed | $12,750 |
| Tax reduction due to the claim for a company in year 2 | $0 as already fully claimed | $3,315 |
Rules Apply to Assets of Any Value
There is no maximum asset value that the rules apply to. Previously, limits were initially $25,000. This was then changed to $30,000 and with the advent of coronavirus, changed to $150,000.
Date the Rules Apply To
The rules apply to assets that are first held and first used or installed ready for use for business between 7:30pm AEDT on 6 October 2020 and 30 June 2022.
Second Hand Assets
For businesses with aggregated turnover of less than $50 million, the cost of second-hand assets can also be fully claimed in the financial year that the assets are first used.
Deducting the Cost of Improvements to Assets
Improvements to assets can also be fully claimed regardless of whether those assets were acquired before or after the start of the new rules.
Assets Excluded from the Rules
The following assets are excluded from the rules.
- assets that are leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease
- assets you allocated to a low-value assets (pool) before using the simplified depreciation rules
- horticultural plants including grapevines
- software allocated to a software development pool (but not other software)
- capital works deductions.
Depreciating Your Existing ‘Small-Business Entity Pool’ Balance
Many businesses have assets that are depreciated in a ‘small-business entity pool’ at 30% per annum.
Businesses with an aggregated turnover of less than $10 million can now deduct the balance of their simplified depreciation pool in their 2021 or 2022 financial statements and tax returns.
An example of the impact of the change for the first two years for a pool balance of $200,000 is below.
| Small-business entity pool balance of $200,000 | New rules | Old rules with depreciation calculated at 30% using the ‘diminishing value’ method |
| Amount claimed as expense in Profit and Loss statement in 2020 | $200,000 | $60,000 |
| Tax reduction due to the claim for a company in year 1 | $52,000 | $15,600 |
| Amount claimed as expense in Profit and Loss statement – year 2 | Not applicable as already fully claimed | $42,000 |
| Tax reduction due to the claim for a company in year 2 | $0 as already fully claimed | $10,920 |
Where to Find Whether Your Business Has a ‘Small-Business Entity Pool’ that it can Write-Off in 2021
The balance sheet report will list assets held by the business. Providing these assets are not excluded assets in the list above, the value of any assets less any depreciation already claimed will be able to be claimed in the 2021 financial statements and tax return.
Later Sale or Disposal of Asset and Depreciation for Small Business
If you write-off an asset and then sell or dispose of that asset, you need to include the sale proceeds as income.
If an asset is lost or destroyed and you receive an insurance payout, the amount received is included in the business’s income.
What if I Previously Left the ‘Simplified Depreciation Regime’?
Businesses may have chosen firstly to use the ATO’s simplified depreciation rules and then in a later year, chosen not to. Previously, this would mean that you could not revert to using the simplified depreciation rules for five years. This has now changed and businesses can now use the new rules regardless of how they applied the depreciation rules in prior years.
Summary
Depreciation for small business is now more attractive due to the immediate deduction and tax saving. The rules also simplify the end of year process of calculating depreciation as the full cost of new assets and any existing small business entity asset pool balance can be fully written-off.
For more information, you can visit these links to the ATO’s website:
https://www.ato.gov.au/Newsroom/smallbusiness/General/Budget-boost-to-small-business/