6. Expenses

Use these instructions to complete the expenses portion of the calculation of total profit and loss.

About expense amounts

Write all expense amounts from the company’s financial statements at labels B to S, see relevant item.

Write at label B Foreign resident withholding expenses all expenses that directly relate to income subject to foreign resident withholding. Do not include these amounts at other expense labels.

Input tax credit entitlements that arise for outgoings are excluded from expenses, see 6. Calculation of total profit or loss.

Write non-deductible expenses incurred in deriving any exempt income at the appropriate expense labels. Add back these non-deductible expenses at item 7 – label U Non-deductible exempt income expenditure.

Other expenses, to the extent that they are not deductible in 2022–23, which have been included at item 6 – labels A to S, are added back at item 7 – label W Non-deductible expenses. This includes non-deductible expenses incurred in deriving any non-assessable non-exempt income.

Record prepaid expenses that appear in the company’s financial statements at the relevant expense label. Where the amounts of those expenses differ from the amounts which are deductible for income tax purposes in 2022–23, make adjustments at item 7 – labels W Non-deductible expenses or X Other deductible expenses.

For a company to claim a deduction for gifts and donations made to an organisation, the organisation must be a deductible gift recipient (DGR). DGRs are endorsed by the ATO or specifically named in the income tax law. All receipts issued for gifts to a DGR must include the name of the fund, authority or institution to which the gift has been made and the DGR’s ABN, and must state that the receipt is for a gift. To check whether an organisation is a DGR, go to abr.business.gov.auExternal Link or phone 1300 130 248.

The company may elect to spread a deduction for a gift over 5 income years or less where the gift is money, property gifted to the Cultural Gifts Program, certain heritage property or property valued by us at more than $5,000.

B – Foreign resident withholding expenses

Only complete item 7 – label B Foreign resident withholding expenses if the company is a foreign resident. An Australian resident should not include expenses, such as expenses incurred in deriving foreign sourced income, at label B.

Write at label B, all expenses directly relating to gaining income subject to foreign resident withholding (shown at item 6 – labels Income, B Gross payments subject to foreign resident withholding, D Gross distribution from partnerships or E Gross distribution from trusts).

Any expenses written at label B that directly relate to gaining income that is not assessable in Australia should also be written at item 7 – label U Non-deductible exempt income expenditure.

Do not include at this label expenses in relation to foreign resident capital gains withholding.

A – Cost of sales

Small business entities

Small business entities only need to account for changes in the value of their trading stock in limited circumstances; see Closing stock. If the company does not need to account for the change in value of closing stock, its closing stock value will equal its opening stock value. If the company needs to account for the change in value of closing stock, or chooses to do so, see Closing stock for information about how to calculate the closing stock value. For more information on calculating cost of sales, see below.

All companies

Write at item 6 – label A Cost of sales the cost of anything produced, manufactured, acquired or purchased for manufacture, sale or exchange in deriving the gross proceeds or earnings of the business. This includes freight inwards and may include some external labour costs if these are included in the cost of sales account in the normal accounting procedure of the business.

If the cost of sales account is in credit at the end of the income year (that is, a negative expense), print L in the CODE box at the right of the amount at label A. Do not print brackets around this amount.

For more information on the circumstances in which packaging items held by a manufacturer, wholesaler or retailer are ‘trading stock’ as defined in section 70-10 of the ITAA 1997, see TR 98/7 Income tax: whether packaging items (i.e. containers, labels, etc) held by a manufacturer, wholesaler or retailer are trading stock.

Do not include input tax credit entitlements in cost of sales.

For more information, see Accounting for trading stock.

C – Contractor, sub-contractor and commission expenses

Write at label C the expenditure incurred for labour and services provided under contract other than those in the nature of salaries and wages – for example:

• payments to self-employed people, such as consultants and contractors, this includes those who operate under a labour-hire arrangement or a voluntary agreement
• commissions paid to people not receiving a retainer
• agency fees, for example, advertising
• service fees, for example, plant service
• management fees
• consultants’ fees.

Do not include the following at label C:

• expenses for external labour that are incorporated into the amount written at item 6 – label A Cost of sales
• expenses for accounting or legal services – include them at item 6 – label S All other expenses.

Record keeping

Keep a record of the following:

• name and address of the payee
• nature of the labour or services provided
• the amount paid.

D – Superannuation expenses

Write at label D the superannuation expenses incurred for the income year.

Employers are entitled to a deduction for contributions made to a complying superannuation, provident, benefit or retirement fund, or retirement savings account (RSA), if the contribution is to provide superannuation benefits for employees or to provide benefits to an employee’s dependants on the employee’s death. Superannuation benefits mean payments for superannuation member benefits or superannuation death benefits.

Provided certain conditions are met, employers can claim a deduction for superannuation contributions made for a former employee within 4 months of the employee ceasing employment and at any time after the employee ceases employment for defined benefit interests.

A deduction is allowable in the income year in which the contributions are made.

There is no limit on the amount of contributions that can be claimed as a deduction by an employer contributing to a complying superannuation fund or RSA for employees under the age of 75 years. However, the employee may be liable to pay additional tax if their concessional contributions exceed their concessional contributions cap. For more information, see Super contributions – too much can mean extra tax.

If an employee has reached the age of 75 years, there is a restriction on the deduction that can be claimed for an employer contribution to a complying superannuation fund or RSA. For contributions made after the 28th day of the month following the employee’s 75th birthday, the deduction claimable is limited to the greater of the following amounts:

• the amount of the contribution required under an industrial award, determination or notional agreement preserving state awards; or
• the amount of the contribution that reduces the employer’s charge percentage under the Superannuation Guarantee (Administration) Act 1992 for the employee.

The adjustments for taxation purposes are included at item 7 – label W Non-deductible expenses.

No deduction is allowable if the fund is a non-complying fund.

In addition, contributions made to a non-complying fund do not count towards superannuation guarantee obligations. The superannuation guarantee charge is payable on the superannuation guarantee shortfall. As such, it is neither a superannuation contribution nor tax deductible.

Contributions made by employers to be offset against a superannuation guarantee charge liability are not deductible.

Contributions paid by an employer for employees to a non-complying superannuation fund may be fringe benefits and, as such, may be subject to tax under the Fringe Benefits Tax Assessment Act 1986.

Consolidated or MEC groups

The head company includes at label D the employee superannuation expenses of all the members of the group.

The head company includes at item 7 – label W Non-deductible expenses any non-deductible employee superannuation expenses of all the members of the group.

For more information, see Key super rates and thresholds.

E – Bad debts

Write at label E the bad debts expense incurred for the income year.

• Include recovery of bad debts at item 6 Income – label R Other gross income.
• A deduction for bad debts is not allowable under subsection 25-35(1) of the ITAA 1997 unless the debt that is bad has previously been included in assessable income, or is for money lent in the ordinary course of the business of lending money by a company carrying on that business.
• Do not include accounting provisions for doubtful debts at label E – include these at item 6 Expenses – label S All other expenses and add them back at item 7 – label W Non-deductible expenses.
• Before a bad debt can be claimed, it must be bad and not merely doubtful. The deduction depends on the facts in each case and, where applicable, the action taken for recovery. For more information, see TR 92/18 Income tax: bad debts.

A deduction can also be claimed for:

• partial debt write-offs where only part of a debt is bad and is written off
• losses incurred in debt-equity swaps for debt extinguished after 26 February 1992 if sections 63E to 63F of the ITAA 1936 are satisfied. Under these sections, a deduction may be allowable for the difference between the amount of the debt extinguished and the greater of the market value of the equity or the value at which the equity is recorded in the creditor’s books at the time of issue. Generally, the market value of the equity is the price quoted on the stock exchange or, if the equity is not listed, the net asset backing of the equity.

A deduction for a bad debt or loss on a debt-equity swap is only allowable if the company claiming the deduction satisfies:

• a continuity of ownership test (or we consider it unreasonable to have to satisfy the test), see Subdivision 165-C of the ITAA 1997
• the business continuity test (if the continuity of ownership test is not satisfied or it is not practicable to show that it is). For the operation of the business continuity test, see Subdivision 165-E of the ITAA 1997, TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132, and Law Companion Ruling LCR 2019/1 The business continuity test – carrying on a similar business.

Where a debt was incurred in an income year prior to that in which it is written off as bad, the company must satisfy the continuity of ownership test at all times from the date on which the debt was incurred through to the end of the income year in which it writes off the debt.

Where a debt was both incurred and written off as bad in the same income year, the company must satisfy the continuity of ownership test at all times during that income year.

The continuity of ownership tests applicable to bad debts are subject to:

• the anti-avoidance provisions in Subdivision 165-D of the ITAA 1997 relating to arrangements designed to affect the beneficial ownership of shares or enjoyment of rights attaching to shares
• the anti-avoidance provisions in Subdivision 175-C of the ITAA 1997 relating to schemes designed to obtain tax benefits from unused bad debt deductions.

For widely held companies and eligible Division 166 companies, the continuity of ownership test in Subdivision 165-C may be modified by Subdivision 166-C of the ITAA 1997, which provides a simplified method for determining the company’s ultimate majority ownership.

If the TOFA rules apply to the company, show at label E all of the company’s bad debts. This includes amounts from financial arrangements subject to the TOFA rules.

Record keeping

If the company writes off bad debts during the income year, keep a statement for each debt for which a write-off occurred, showing:

• the debtor's name and address
• the amount of the debt
• the reason why the debt is regarded as bad
• the income year that the amount was returned as income.

Consolidated and MEC groups

Special rules apply to determine if the head company of a consolidated or MEC group can deduct a bad debt that for a period has been owed to a member of a consolidated or MEC group and for another period has been owed to an entity that was not a member of that group, see Subdivisions 709-D and 719-I of the ITAA 1997.

F – Lease expenses within Australia

Write at item 6 – label F Lease expenses within Australia the expenditure incurred through both finance and operating leases on leasing assets, including motor vehicles and depreciating assets such as plant. However, do not include the expenditure at label F if it is incurred under a hire-purchase agreement. Such expenses are referred to in Appendix 4.

Do not include the cost of leasing real estate or the capital expenditure incurred to terminate a lease or licence. However, section 25-110 of the ITAA 1997 provides a 5 year straight-line deduction for certain capital expenditure incurred to terminate an operating lease or licence if the expenditure is incurred in the course of carrying on a business or in connection with ceasing to carry on a business. Include the allowable deduction at item 7 – label X Other deductible expenses. See worksheet 2 and note 6, and Claiming a tax deduction for depreciating assets and other capital expenses.

I – Lease expenses overseas

Write at item 6 – label I Lease expenses overseas the lease expenses incurred through both finance and operating leases on leasing depreciating assets, including motor vehicles. However, do not include the expenditure at label I if it is incurred under a hire-purchase agreement. Such expenses are referred to in Appendix 4.

Exclude the cost of leasing real estate, capital expenditure incurred to terminate a lease or licence, and expenditure on items other than depreciating assets leased from non-residents. For more information on capital expenditure incurred to terminate an operating lease or licence, see item 6 – label F – Lease expenses within Australia.

Record keeping

If a deduction is claimed for the cost of leasing depreciating assets, keep a record of the following:

• a description of the items leased
• where applicable, the country from which the items were leased
• full particulars of the lease expenses for each item of property, including motor vehicles, showing  
  • to whom the payments were made
  • where applicable, the country to which the payments were made
  • the terms of the payments, including details of any prepayments or deferred payments
  • if any assignment, defeasance or re-direction to pay the payments was entered into, full particulars of those arrangements, including to whom the payments were made
  • details of any use other than for producing assessable income
  • any documentation on or relating to the lease of the asset.

In certain cases, an amount of tax (withholding tax) is withheld from amounts paid or payable under equipment leases to non-residents and overseas branches of residents, and must be remitted to the ATO. If you have withheld amounts from payments to non-residents, you may need to lodge by 31 October 2023 a PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report.

H – Rent expenses

Write at item 6 – label H the expenditure incurred as a tenant on rental of land and buildings used in the production of income.

V – Interest expenses within Australia

Write at item 6 – label V the interest expenses incurred on money borrowed from Australian sources.

If the TOFA rules apply to the company, show at label V all interest incurred on money borrowed from Australian sources. This includes interest on financial arrangements subject to the TOFA rules.

An amount of interest may not be an allowable deduction, for example, where the thin capitalisation provisions disallow an interest deduction. Include the amount of interest not allowable at item 7 – label W Non-deductible expenses.

For information on thin capitalisation, see Appendix 6.

Distributions from a non-share equity interest are not deductible; see the Guide to the debt and equity tests. This provides an overview of the debt and equity rules and explains what a non-share equity interest is.

J – Interest expenses overseas

Write at item 6 – label J the interest expenses incurred on money borrowed from overseas sources.

If an amount is reported at label J, complete and attach an International dealings schedule 2023.

For more information, see PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions.

If the TOFA rules apply to the company, show at J all interest expenses incurred on money borrowed overseas. This includes interest on financial arrangements subject to the TOFA rules.

An amount of tax (withholding tax) is generally withheld from interest paid or payable to non-residents and to overseas branches of residents, and must be remitted to the ATO. If you have withheld amounts from payments to non-residents you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report by 31 October 2023.

An amount of interest may not be an allowable deduction, for example, where the thin capitalisation provisions disallow an interest deduction. Include the amount of interest not allowable at item 7 – label W Non-deductible expenses.

For information on thin capitalisation, see Appendix 6.

Distributions from a non-share equity interest are not deductible. For an overview of the debt and equity rules and an explanation of a non-share equity interest, see Guide to the debt and equity tests.

Record keeping

If interest is paid to non-residents, keep a record of the following:

• names and addresses of recipients
• amount of interest paid or credited
• documentation that identifies the substance of the financial arrangement and supports the amount of interest expenses claimed, for instance a signed copy of the loan agreement
• details of tax withheld, where applicable, and the date on which it was remitted to us.

U – Royalty expenses overseas

Write at item 6 – label U the royalty expenses incurred during the income year to non-residents.

If an amount is reported at label U, complete and attach an International dealings schedule 2023.

An amount of tax (withholding tax) is generally withheld from royalties paid or payable to non-residents and overseas branches of residents, and must be remitted to the ATO. If you have withheld amounts from payments to non-residents, you may need to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report by 31 October 2023.

Record keeping

Keep a record of the following:

• names and addresses of recipients
• amounts paid or credited
• documentation that identifies the nature of the benefit derived, for example, a signed copy of the royalty agreement
• details of tax withheld, where applicable, and the date on which it was remitted to us.

W – Royalty expenses within Australia

Write at item 6 – label W the royalty expenses paid during the income year to Australian residents.

Record keeping

Keep a record of the following:

• names and addresses of recipients
• amounts paid
• nature of the benefit derived, for example, a copy of the royalty agreement
• details of amounts withheld, where applicable, and the date on which they were remitted to us.

X – Depreciation expenses

Small business entities using simplified depreciation

Show the depreciation expenses of small business entities using the simplified depreciation rules as tax values, at item 6 – label X Depreciation expenses (see Small business entities for how to calculate this amount.

Small business entities using simplified depreciation should complete, as applicable:

• item 10 – label A Deduction for certain assets (costing less than the relevant instant asset write-off threshold)
• item 10 – label B Deduction for general small business pool

They do not complete item 7 – label F Deduction for decline in value of depreciating assets.

All other companies

Show at item 6 – label X Depreciation expenses the book depreciation expenses for depreciating assets.

Do not include:

• profit on sale of depreciating assets, shown at Income, item 6 – label R Other gross income
• loss on sale of depreciating assets, shown at Expenses, item 6 – label S All other expenses.

If an amount is written at item 6 – label X Depreciation expenses, make reconciliation adjustments at item 7 even if the depreciation expense is the same amount as the deduction for decline in value.

You need to complete:

• item 7 – label W Non-deductible expenses
• item 7 – label F Deduction for decline in value of depreciating assets.

For reconciliation purposes, split the amount written at item 7 – label X into R&D and non-R&D amounts when adding back. Include non-R&D amounts at item 7 – label W Non-deductible expenses when adding back.

Include R&D amounts at item 7 – label D Accounting expenditure in item 6 subject to R&D tax incentive when adding back.

Write the deduction for decline in value of most depreciating assets at item 7 – label F Deduction for decline in value of depreciating assets. If a depreciating asset is subject to the R&D tax incentive, this amount will form part of your notional R&D deduction. Eligible companies can claim this notional R&D deduction amount as an R&D tax offset.

For more information, see:

• 21. Research and development tax incentive
• Research and development tax incentive schedule instructions 2023.

Our PS LA 2003/8 Practical approaches to low-cost business expenses provides guidance on the threshold rule and the sampling rule taxpayers can apply to determine if their business expenses on low cost items are to be treated as revenue expenditure.

Subject to certain qualifications, the 2 methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost items.

Under the threshold rule, low-cost items with a typically short life costing $100 or less are assumed to be revenue in nature and are immediately deductible.

The sampling rule allows taxpayers with a low-value pool to use statistical sampling to determine the proportion of the total purchases on low-cost tangible assets that are revenue expenditure.

Small business entities

How to complete this section if you are a small business entity and have chosen to use the simplified depreciation rules.

In this section

• Small business concessions: changes to simplified depreciation rules
• Calculating depreciation deductions for small business entities
• Step 1: Deduction for certain assets (using temporary full expensing)
• Step 2: General small business pool
• Step 3: Other depreciating assets
• Step 4: Ceasing to hold depreciating assets
• 5 year restriction

Small business concessions: changes to simplified depreciation rules

Small businesses using the simplified depreciation rules have access to temporary full expensing. You cannot opt out of temporary full expensing for assets that the simplified depreciation rules apply to. For assets first held from 7:30 pm (AEDT) on 6 October 2020 until 30 June 2023, you must deduct the taxable purpose proportion of all eligible depreciating assets (irrespective of value) in the income year they are first used, or installed ready for use, for a taxable purpose. The deduction amount is the taxable purpose proportion of the asset's cost less any decline in value between when you first held the asset and when it was first used or installed ready for use. These assets are not added to your small business pool.

Special rules apply if the depreciating asset is a passenger vehicle.

Under temporary full expensing you must also claim a deduction for the cost of improvements made from 7:30 pm (AEDT) on 6 October 2020 to 30 June 2023 to an asset that you have fully depreciated under the simplified depreciation rules (including instant asset write-off) in an earlier income year, provided you have not previously claimed improvement costs to the asset. You must claim an immediate deduction for the taxable purpose proportion of the improvement cost and no threshold applies.

For income years ending between 7:30 pm AEDT on 6 October 2020 and 30 June 2023, you deduct the entire balance of the small business pool (there is no threshold for that period).

Small business entities that have previously elected out of the simplified depreciation rules are no longer subject to the ‘lock-out’ rule (which prevented small businesses from re-entering the simplified depreciation regime for 5 years if they had opted out). These entities may re-elect to use the simplified depreciation rules.

The suspension of the 5 year restriction only applies from 12 May 2015 to the end of an income year that includes 30 June 2023.

If the company is an eligible small business entity and has chosen to use the simplified depreciation rules, write at item 6 – label X Depreciation expenses the total depreciation deductions being claimed under the simplified depreciation rules and the uniform capital allowances (UCA) rules. You must also complete:

• item 9 – labels S Temporary full expensing deductions and T Number of assets you are claiming for eligible assets where temporary full expensing applies
• item 10 – label A Deduction for certain assets (costing less than the relevant instant asset write-off threshold) for eligible assets where instant asset write-off applies
• item 10 – label B Deduction for general small business pool to record the write off of your small business pool under temporary full expensing.

Some depreciating assets are excluded from these simplified depreciation rules but a deduction may be available under the UCA or other capital allowance regime (such as the R&D depreciating asset regime).

For certain depreciating assets used by a small business entity in the course of carrying on a business of primary production, the entity can choose whether to use these simplified depreciation provisions or specific UCA provisions under Subdivision 40-F or 40-G of the ITAA 1997. The specific UCA provisions apply to water facilities, fencing assets, fodder storage assets, landcare operations, electricity connections and telephone lines. For more information on these UCA provisions, see Appendix 4.

For more information about the small business entity depreciation rules, see Simpler depreciation for small business or phone 13 28 66.

Calculating depreciation deductions for small business entities

Use the following steps 1 to 4 to calculate the depreciation deductions only if the company is an eligible small business entity and has chosen to use the simplified depreciation rules.

If the company’s profit and loss statement provides the amounts to complete worksheet 1, write these amounts in the worksheet. Otherwise, use steps 1 to 4 to calculate its depreciation deductions.

The amounts in the table must be tax and not accounting values.

Step 1: Deduction for certain assets (using temporary full expensing)

For assets you start to hold any time between 7:30 pm (AEDT) 6 October 2020 and 30 June 2023, and first use (or have installed ready for use) for a taxable purpose in the 2022-23 year you must immediately deduct the taxable purpose proportion of the asset's cost (less any decline in value since acquiring the asset) under temporary full expensing.

Under temporary full expensing, you must also claim a deduction for the cost of improvements made in the 2022-23 year to an asset that you have fully depreciated under the simplified depreciation rules (including instant asset write-off) in an earlier income year, provided you have not previously claimed improvement costs to the asset. You must claim an immediate deduction at this step for the taxable purpose proportion of the improvement cost and no threshold applies. Any later improvements are added to the small business pool.

For assets which qualify for a deduction under the small business entity depreciation rules, work out the extent it is used for the purpose of producing assessable income (taxable purpose proportion).

The deduction for each eligible asset is calculated as:

Asset’s adjustable value × its taxable purpose proportion

The adjustable value of an asset is its cost less its decline in value since it was first used, or installed ready for use, for any purpose, whether business or private.

The adjustable value of an asset, at the time it was first used, or installed ready for use, for a taxable purpose, will be its cost unless the asset was previously used, or installed ready for use, by the company solely for non-taxable purposes. For example, for a truck bought on 1 October 2021 at a cost of $149,990 (excluding input tax credit entitlements) and used for producing assessable income from that date at an estimated 70% of the time, the immediate deduction would be $149,990 × 70% = $104,993.

Add up all of the amounts from this step and write the total at row a in worksheet 1.

Do not include in this calculation amounts for depreciating assets that the company started to hold before starting to use the simplified depreciation rules. These assets are allocated to the general small business pool (see step 2).

Step 2: General small business pool

Companies that are already using simplified depreciation rules

Opening pool balance

For companies using the simplified depreciation rules, the opening balance of the general small business pool is the closing pool balance for the previous income year, adjusted to reflect any changed business use of a pooled asset. However, as the company will have deducted the entire balance (if any) of the small business pool under temporary full expensing in the 2021–22 income year, the opening balance of the pool at the beginning of the 2022–23 income year is $0.

Additions to the opening pool balance

Any assets that the company starts to hold during the relevant period (7:30 pm (AEDT) 6 October 2020 and 30 June 2023) and first uses, or instals ready for use, in the 2022 - 23 income year are fully depreciated under temporary full expensing (see step 1). Therefore, no assets first used, or installed ready for use, in the 2022-23 income year are allocated to the pool.

Improvement costs incurred in the 2022-23 income year for an asset fully depreciated in an earlier income year (whether under temporary full expensing or another instant asset write-off threshold) are also fully depreciated under temporary full expensing (see step 1) and so the improvement costs do not get allocated to the pool unless the company has previously incurred costs to improve the asset in an earlier income year and fully depreciated those improvement costs in that earlier year.

If the company has previously fully depreciated an improvement cost for the asset and incurs further improvement costs in the 2022-23 year, the asset is allocated to the pool and the value of the asset is equal to the cost of those further improvements. This amount is added to the pool balance.

If the company incurs costs associated with disposing of, or otherwise ceasing to hold, an asset allocated to the pool, those costs are added to the pool.

Subtractions from the opening pool balance

If the company ceases to hold an asset that has been allocated to the pool in the 2022-23 income year, or an earlier income year, the taxable purpose proportion of the termination value is subtracted from the pool balance (see step 4b).

If that subtraction results in pool balance going below zero, the amount below zero is included in your assessable income at item 7 – label B Other assessable income and there is no deduction under temporary full expensing with respect to your general pool balance in the 2022-23 income year.

However, if the pool balance at the end of the 2023 income year is greater than zero (after any subtractions for balancing adjustment events happening to assets allocated to the general small business pool), under temporary full expensing, the company must deduct the entire general pool balance in the 2022-23 income year. Write the amount at row b of worksheet 1

Closing pool balance

The closing pool balance for this year becomes the opening pool balance for 2023–24, after any adjustments to reflect the changed business use of a pooled asset. The company will have a closing pool balance for the 2022-23 year of $0.

Companies that start to use simplified depreciation rules in the 2022–23 income year

Opening pool balance

For companies that start to use the simplified depreciation rules in the 2022-23 income year, the opening pool balance is the sum of the taxable purpose proportions of the adjustable values of those depreciating assets that are held and used (or installed ready for use), just before the start of the 2022-23 income year, and that are not excluded from the simplified depreciation rules.

Additions/subtractions to the pool balance

Any assets that the company starts to hold during the relevant period (7:30 pm (AEDT) 6 October 2020 and 30 June 2023) and first uses, or instals ready for use, in the 2022 - 23 income year are fully depreciated under temporary full expensing (see step 1). Therefore, no assets first used, or installed ready for use, in the 2022-23 income year are allocated to the pool.

If the company incurs improvement costs in the 2022-23 year to an asset that was allocated to the small business pool at the start of the 2022-23 year, the taxable purpose proportion of those costs are added to the pool.

If the company incurs costs associated with disposing of, or otherwise ceasing to hold, an asset allocated to the pool, those costs are added to the pool.

If the company ceases to hold an asset that was allocated to the small business pool at the start of the 2022-23 income year, the taxable purpose proportion of the termination value of the asset is subtracted from the pool balance (see step 4b).

If that subtraction results in the pool balance going below zero, the amount below zero is included in your assessable income at item 7 – label B Other assessable income and there is no deduction under temporary full expensing with respect to your general pool balance in the 2023 income year.

However, if the pool balance at the end of the 2023 income year is greater than zero (after any subtractions for balancing adjustment events happening to assets allocated to the general small business pool), under temporary full expensing, the company must deduct the entire general pool balance in the 2023 income year. Write the amount at item row b in worksheet 1.

Closing pool balance

The closing pool balance for this year becomes the opening pool balance for 2023–24, after any adjustments to reflect the changed business use of a pooled asset. The company will have a closing pool balance at the end of the 2022-23 year of $0.

Do not write the closing pool balance on the company’s tax return.

Step 3: Other depreciating assets

Calculate the deduction for the decline in value of all the other depreciating assets of the company that are not included in steps 1 and 2. For information on how to calculate the decline in value of these assets, see the Guide to depreciating assets 2023.

Write the total deduction at row d in worksheet 1.

Do not include at row d in worksheet 1 depreciating assets that qualify for a deduction under Subdivision 40-F or 40-G of the ITAA 1997 as water facilities, fencing assets, fodder storage assets, landcare operations, electricity connections or telephone lines in the company’s primary production business and for which the company has chosen to claim a deduction under these subdivisions and not under the small business entity depreciation rules. Include these deductions at item 7 – label N Landcare operations and deduction for decline in value of water facility, fencing asset and fodder storage asset. Include deductions for qualified electricity connections and telephone lines at item 7 – label X Other deductible expenses.

Step 4: Ceasing to hold depreciating assets

Step 4a Certain assets for which an immediate deduction has been claimed

If a balancing adjustment event happens to a depreciating asset for which the company has claimed an immediate deduction in step 1 this year or in a previous year under the relevant instant asset write-off threshold, it must include the taxable purpose proportion of the termination value at item 7 – label B Other assessable income.

A balancing adjustment event occurs when the company stops holding a depreciating asset – for example, when the company sells the asset, or the asset is lost or destroyed. Termination value includes money received from the sale of an asset or insurance money received.

For example, for an asset used only 60% for an income-producing purpose that was sold for $200 (excluding GST) only $120 will be assessable and included as a reconciliation adjustment.

For example, the company acquired an asset on 1 February 2019 for $6,400 for 100% taxable use and claimed an immediate write-off under the threshold which existed at that time. The company disposed of the asset at arm's length on 1 February 2023 for $3,000 (excluding GST). Include $3,000 as income at item 7 – label B Other assessable income.

Step 4b Assets allocated to the general small business pool

If the company ceases to hold a depreciating asset that has been allocated to the general small business pool in this income year, or in a previous income year due to the instant asset write off threshold that was in place at the time, the taxable purpose proportion of the termination value is subtracted from the pool balance. For example, for a pooled depreciating asset used only 60% for an income-producing purpose which was sold for $3,000 (excluding GST) only $1,800 will be subtracted from the pool balance.

If, after making the subtraction, the pool balance is more than zero, write this deduction against general small business pool assets at row b in worksheet 1 (if you have not already done so at step 2).

If the pool balance is less than zero, you include the amount below zero in your assessable income at item 7 – label B Other assessable income (if you have not already done so at step 2).

If expenses are incurred in disposing of, or otherwise ceasing to hold, a depreciating asset, these expenses may be taken into account in step 2 by adding them to the pool balance.

Step 4c Other depreciating assets

For information on how to calculate any balancing adjustment amounts on the happening of a balancing adjustment event of other depreciating assets, see the Guide to depreciating assets 2023.

Include assessable balancing adjustment amounts at item 7 – label B Other assessable income. Include deductible balancing adjustment amounts at item 7 – label X Other deductible expenses. See Worksheet 2.

Worksheet 1: Depreciation deductions (small business entities using simplified depreciation only)

Row	Calculation element	Total
a	Certain assets (immediately depreciated under temporary full expensing)	$
b	General small business pool	$
c	General small business pool (½ rate) – not applicable in the 2023 income year	$
d	Other assets	$
e	Depreciation expenses, add row a to row d	$

Transfer the amount at row e to item 6 – label X Depreciation expenses.

Transfer the amount at row a to item 9 – label S Temporary full expensing deductions.

Transfer the total of the amounts at rows b and c to item 10 – label B Deduction for general small business pool.

5 year restriction

The law has been changed to suspend the 5 year 'lock out' rule that applies to small business entities that have previously chosen to use these simplified depreciation rules but have opted-out in a later year.

If the company is a small business entity that has previously chosen to use these simplified depreciation rules but in a later year has chosen to stop using this concession, the company can again choose to use the simplified depreciation rules until the end of 30 June 2023.

To notify the Commissioner of the choice, lodge the company tax return and keep relevant records for the required period of time. The company is not required to lodge any other form to notify of their choice.

Y – Motor vehicle expenses

Write at item 6 – label Y Motor vehicle running expenses only. These expenses include fuel, repairs, registration fees and insurance premiums. They do not include the expenses shown at item 6 – labels:

• F Lease expenses within Australia
• I Lease expenses overseas
• V Interest expenses within Australia
• J Interest expenses overseas
• X Depreciation expenses.

Z – Repairs and maintenance

Write at item 6 – label Z the expenditure on repairs and maintenance of plant, machinery, implements and premises.

If the company has any item of a capital nature at label Z, add it back at item 7 – label W Non-deductible expenses.

Provided it is not expenditure of a capital nature, the company may deduct the cost of repairs to property, plant, machinery or equipment used for producing assessable income or in carrying on a business for that purpose. Deductions for expenditure on repairs to property must be reduced to reflect the extent to which the property is not used for an income-producing purpose, for example, where the property is also used for private purposes, or in the production of exempt income.

If items are newly acquired, including by way of a legacy or gift, the cost of remedying defects in existence at the time of acquisition is generally of a capital nature. Expenditure incurred in making alterations, additions or improvements is of a capital nature and is not deductible when incurred. However, it may be subject to depreciation under the UCA or another capital allowance regime. For more information on deductions for repairs, see TR 97/23 Income tax: deductions for repairs.

G – Unrealised losses on revaluation of assets to fair value

Write at label G the amount of any unrealised loss made on the revaluation of assets and liabilities to fair value that may arise as a result of the adoption of Australian equivalents to the international financial reporting standards.

• Include any unrealised loss on the revaluation of a financial arrangement to fair value deductible under the TOFA rules.
• Adjustments for tax purposes are made at item 7 Reconciliation to taxable income or loss.
• An unrealised loss that is not deductible is added back at item 7 – label W Non-deductible expenses.
• Any net capital gain for taxation purposes is included at item 7 – label A Net capital gain.
• Any net capital loss is included with any unapplied capital losses carried forward to later income years and is written at item 13 – label V Net capital losses carried forward to later income years.

S – All other expenses

Write at item 6 – label S the total of all other expenses including losses on the disposal of depreciating assets (including assets used in R&D activities subject to the R&D tax incentive).

Include at label S any losses from the company’s financial arrangements to which the TOFA rules apply, except where they have already been included at item 6.

Also include at label S any extraordinary expenses, that is, expenses or losses from events outside the ordinary operations of the company and not of a recurring nature. An extraordinary loss that is not deductible is added back at item 7 – label W Non-deductible expenses.

Label S excludes amounts included at item 6 Expenses– labels B to G.

Calculation of some deductions may be affected by the commercial debt forgiveness provisions, see Appendix 5.

Q – Total expenses

Write at item 6 – label Q the total of all expense items written at item 6 – labels B to S.

If there is a negative amount at item 6 – label A (which is marked with code L) that exceeds the total of the item 6 Expenses at labels B and C to label S, print code L in the CODE box at the right of the amount at item 6 – label Q.

T – Total profit or loss

Write the company’s total profit or loss at item 6 – label T. Total profit or loss is the amount written at item 6 Income – label S Total income, less the amount written at item 6 Expenses – label Q Total expenses. If this amount is a loss, print code L in the box at the right of the amount at label T.

Continue to: 7. Reconciliation to taxable income or loss