Year End Series – Increased Instant write off rules and accelerated depreciation for Small Business
Assets that you generally purchase in your business are not usually deductible as an ordinary business expense. However, deductions may be available for the decline in value (or depreciation) of such assets to the extent it is used for a taxable purpose (for example producing income). The decline in value usually starts at the earlier of when the taxpayer first uses the asset and when the taxpayer first has the asset installed and ready for use.
Whilst there are a couple of different ways depreciation can be calculated, small businesses can opt for simplified depreciation rules. In summary these rules allow small businesses to:
· Immediately deduct the cost of a depreciating assets below a certain threshold (see below)
· Allocate all assets above the threshold to a “general business pool”
Good news number 1:
Small businesses utilising the simplified depreciation rules can claim an immediate deduction for assets costing less than:
· $30,000 – for assets acquired at or after 7:30pm on 12th of May 2015 and first used or installed ready for use between 2nd of April 2019 and 11th of March 2020.
· $150,000 – for assets acquired at or after 7:30pm on 12th of May 2015 and first used or installed ready for use between 12thof March 2020 and 30th June 2020.
These increased immediate deductions limits are only temporary and are part of the government measures to stimulate the economy due to COVID-19 - the Coronavirus Economic Response Package Omnibus Act 2020 (Coronavirus Acts).
What happens when an asset cost is higher than the threshold in the relevant period ($30,000 or $150,000)? Well, the asset will need to be allocated to a general business pool – which I will explain below.
General business pool is a simplified way to calculate the depreciation of assets. All assets are “pooled together” and written off at the same rate – as opposed to calculating the depreciation of each asset individually.
The depreciation of assets in a small business pool is normally calculated as:
· 15% for the first year when the asset is added to the pool.
· 30% for all subsequent years.
Now, good news number 2:
Recent amendments introduced by the Coronavirus Acts provided an accelerated depreciation for entities with annual turnover of less than $500 million, including small business entities using the simplified depreciation rule (the small business pool explained above).
The accelerated depreciation applies for one year only, when the asset was first acquired or installed ready for use.
A small business using the simplified depreciation rules can deduct 57.5% of the asset cost in the first year (instead of the usual 15%). This applies only for new assets (not second hand), installed or ready for use between 12th of March 2020 and 30 June 2021.
There you go – you now know some of the special rules on depreciating assets that apply to the 2019/20 financial year. Don’t leave money on the table!
As always, if you need help in calculating the depreciation deduction of your assets or how to calculate and maintain an asset pool get in touch with us and we are happy to help you.
Oliveira Bern is a chartered accounting firm in Sydney Australia that specialises in servicing small business. We offer tax, accounting and advisory services and our mission is to help you understand and control the finances of your business better – we strongly believe that financial management does not have to be complicated. Come and book a session with us!