Simplified depreciation rules
You can choose to use the simplified depreciation rules if you have a small business with an aggregated turnover of less than:
- $10 million from 1 July 2016 onwards
- $2 million for previous income years.
Aggregated turnover is based on the annual turnover of your business and that of any business entities that are your affiliates or connected with you.
Simplified depreciation rules for small business include:
- an instant asset write-off for assets that cost less than the relevant threshold (which is supplemented with the temporary full expensing from 7.30pm AEDT on 6 October 2020 to 30 June 2023)
- a general small business pool, which has simplified calculations to work out the depreciation deduction.
There were 3 temporary tax depreciation incentives available to eligible small businesses using the simplified depreciation between the 2019–20 and 2022–23 income years:
We have prepared a high-level snapshot to help you work out how the temporary tax depreciation incentives, may apply to you from 11 March 2020 to 30 June 2023. Refer to Interaction of tax depreciation incentives.
Instant asset write-off
Under instant asset write-off, eligible small business owners can immediately write off the business portion of the cost of an asset that costs less than the relevant threshold amount for the year the asset is first used or installed ready for use.
For an asset for which a small business has claimed an immediate deduction under the simplified depreciation rules in a prior income year, it can also immediately deduct an amount included in the second element (cost addition) of that asset's cost, where the amount is:
- the first deductible amount of second element cost incurred after the end of the income year in which the asset was written off
- less than the relevant threshold amount for the income year it is being claimed.
For the 2023–24 income year the relevant threshold amount is $20,000.
Note: For assets you started to hold, and first used (or had installed ready for use) for a taxable purpose from 7.30pm AEDT on 6 October 2020 to 30 June 2023, the instant asset write-off threshold doesn't apply to businesses using the simplified depreciation rules. These businesses must immediately deduct the business portion of the asset's cost under temporary full expensing.
Small business pool
For income years ending on or after 1 July 2023 and before 6 October 2020 , you:
- pool the business portion of most higher cost assets (those with a cost equal to or more than the relevant instant asset write-off threshold) and claim
- a 15% deduction in the year you start to use them or have them installed ready for use
- a 30% deduction each year after the first year
- deduct the balance of the small business pool at the end of the respective income year if the balance at that time (before applying the depreciation deductions) is less than the instant asset write-off threshold.
For income years ended between 6 October 2020 and 30 June 2023, small business owners using simplified depreciation must deduct the balance of the small business pool under temporary full expensing at the end of the respective income year.
Using simplified depreciation
If you choose to use the simplified depreciation rules, you must:
- use them to work out deductions for all your depreciating assets except those specifically excluded
- apply the entire set of rules, not just individual elements (such as the instant asset write-off)
- only claim a deduction for the portion of the asset used for business or other taxable purposes and not for the portion for private use.
A small number of assets are excluded from the simplified depreciation rules and a car limit applies to the cost of passenger vehicles.
If you stop using simplified depreciation
If you choose to stop using the simplified depreciation rules or become ineligible to use them, you must work out deductions for your depreciating assets using the general depreciation rules. For income years ending between 6 October 2020 to 30 June 2023, you may be eligible to claim deductions under either temporary full expensing or backing business investment incentives.
If you choose to stop using the simplified depreciation rules or become ineligible to use them for an income year, in that and later income years you can't:
- add more assets to the pool which you started to use, or had installed ready for use, during the income year
- claim an instant asset write-off for any new assets under these rules
For depreciating assets which are allocated to your small business pool you:
- continue to claim a 30% deduction for each year, following the allocation year, until the pool balance falls below the instant asset write-off threshold
- then deduct the remaining pool balance.
For income years ending between 6 October 2020 and 30 June 2023 you deduct the balance of your small business pool under temporary full expensing.
To notify the Commissioner of your choice, lodge your tax return and keep your records for the required period of time. You aren't required to lodge any other form to notify of your choice.
Lock out rule
From 7.30pm AEST 12 May 2015 to 30 June 2024 the ‘lock out’ rule is suspended to allow small businesses that have chosen to stop using the simplified depreciation rules to take advantage of temporary full expensing and the instant asset write-off.
Previously, the 'lock out' rule prevented small businesses from re-entering the simplified depreciation system for 5 years if they had opted out.
Using simplified depreciation rules again
If you have stopped using the simplified depreciation rules, and then start using them again, you must adjust the opening pool balance for any depreciating assets that you have started using or installed ready for use since last using these rules.
Your new opening pool balance will be your previous closing balance plus the business portion of the value of any depreciating assets not previously added to the pool.
Bookkeeping and record keeping
Modern bookkeeping systems generally calculate depreciation, but make sure you have chosen the right settings to apply the simplified depreciation rules.
In line with the record-keeping requirements for taxpayers generally, you must keep records for 5 years of:
- how you worked out your opening pool balance
- any change in how much you use the asset in your business
- any assets you dispose of.