Depreciating assets for small business

This short guide helps small businesses to understand what it means to pool assets, immediately write-off assets, and deduct the costs of depreciating assets.

About depreciation for small business

All businesses can claim the costs of most depreciating assets as a tax deduction, if they're used for work purposes.

You can choose to use simplified depreciation rules if your business has a turnover (the total normal sales of your business) of less than:

  • $10 million from 1 July 2016 onwards
  • $2 million for previous income years.

Using simplified depreciation rules means you:

  • immediately write-off the business use of most assets that cost less than $20,000 each, as long as those assets are bought and installed ready for use between 7.30pm (AEST) on 12 May 2015 and 30 June 2018.
  • ‘pool’ most other depreciating assets that cost $20,000 each or more and claim 15% deduction for depreciation of that pool in the first year, and 30% each year after the first.
  • write-off the small business asset pool if the balance is less than $20,000 at the end of a financial year, until 30 June 2018.

Assets you can't depreciate

You can't depreciate certain types of assets under these rules, including horticultural plants, capital works, and software.

Read the full list of excluded assets to the simplified depreciation rules.

Choosing which depreciation rules to use

If you used the general depreciation rules in previous years, you can choose to instead use the simplified depreciation rules – you’re not ‘locked in’ to your previous choice.

Note: After 30 June 2018, if you choose not to use the simplified depreciation rules, you’ll have to wait five years before you can again choose to use them. This is known as the ‘lock out’ rule.

Immediate or instant asset write-off

Immediate or instant asset write-off is also called:

  • accelerated depreciation
  • instant depreciation.

It means you immediately claim the business portion of any eligible depreciating asset that costs less than $20,000 (as long as those assets are bought and installed ready for use between 7.30pm (AEST) on 12 May 2015 and 30 June 2018).

Note: ‘Immediate’ or ‘instant’ doesn’t mean you get cash back from the tax office straight away – it means that you can reduce your taxable income, and your tax payable, in the financial year that you bought and installed them.

There’s no limit to the number of assets you write-off, as long as they each cost less than $20,000.

Example

In June 2016, John paid $50,000 for 10 electric drills that are used in his company for work purposes only. The electric drills are $5000 each. The company’s assessable income in 2015-16 is $300,000.

Because each drill costs less than $20,000, the company immediately deducts the full cost of each drill (that is, in the 2015-16 financial year).

This means that the company’s taxable income would be $250,000. See below:

$300,000 (assessable income) – $50,000 (deductions) = $250,000 (taxable income)

  • Without the deductions: The taxable income is $300,000. At the company tax rate of 28.5%, the tax payable would be $85,500.
  • With the deductions: The taxable income reduces to $250,000. The tax payable would be $71,250.

Pooling assets

For depreciating assets that cost $20,000 or more, you ‘pool’ them into a small business asset pool and claim:

  • a 15% deduction for depreciation of those assets in the first year
  • a 30% deduction for depreciation of those assets in each year after the first

You claim the full balance of a small business pool if the balance is less than $20,000 at the end of a financial year, until 30 June 2018. 

Example

In June 2017, Sally paid $50,000 for 2 advanced computers that are used in her company for work purposes only. The computers are $25,000 each. The company’s assessable income in 2016-17 is $300,000.

Because each computer costs more than $20,000, the company can’t claim the full cost of them straight away.

However, the company will include them in a small business asset pool in the 2016-17 financial year, and claim a 15% deduction for depreciation in the first year (15% of $50,000 is $7500).

This means that the company’s 2016-17 taxable income would be $292,500. See below:

$300,000 (assessable income) – $7500 (deductions) = $292,500 (taxable income)

  • Without the deductions: The taxable income is $300,000. At the company tax rate of 27.5%, the tax payable in the 2016-17 year would be $82,500.
  • With the deductions: The taxable income reduces to $292,500. The tax payable in the 2016-17 year would be $80,437.50.

After the deductions, the closing balance of the asset pool (the closing pool balance) is $42,500 ($50,000 minus $7500).

In 2017-18, the company will claim a 30% deduction of the closing pool balance.

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