The Government has proposed to expand accelerated depreciation by allowing small businesses with aggregated annual turnover of less than $2 million to immediately deduct each asset that cost less than $20,000. The deduction will be available in the income year in which the asset is first used or installed ready for use for a taxable purpose. This will replace the previous deduction threshold of $1,000.
Assets excluded from these depreciation rules include horticultural plants and in-house software. In most cases specific depreciation rules apply to these excluded assets.
Assets valued at $20,000 or more (which can’t be immediately deducted) can be placed in the small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
The Government will also suspend the current ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out) until 30 June 2017.
This proposed measure commences 7.30pm (AEST) 12 May 2015 and will cease on 30 June 2017.
Legislation and supporting material
Legislation for this measure has not yet been drafted. This web page will be regularly update to reflect progress.
The Australian Government announced a new measure for small business with immediate deductibility for assets less than $20,000 in the 2015 Budget on 12 May 2015.
The measure will require legislation and will apply to assets acquired from 7.30pm on 12 May 2015 until 30 June 2017.
When a proposed law change is announced but not yet enacted, the ATO provides advice to taxpayers about following the existing law and also information about the proposed changes.
As this law change will be retrospective if enacted, it is important that small businesses understand their obligations under both the existing and proposed laws.
Importantly, under the announced new measure, small businesses will need to keep records of their purchases to claim their deduction if the law is enacted.
More information about the ATO’s administration of retrospective legislation can be found at administrative treatment of retrospective legislation.
While legislative provisions will outline the specific application of this measure, the question and answer section below provides some guidance as to how the measure might apply based on the details announced in the Federal Budget 2015–16.
Is the measure law yet?
No. The law to give effect to the changes has not been enacted yet. This page will be updated as the measure progresses through the parliamentary process.
Who is eligible?
Any business that meets the definition of small business entity, that is one with an aggregated turnover less than $2 million may be eligible for the immediate deductibility of assets costing less than $20,000.
What is the current law?
Small businesses can elect to use the ‘simplified depreciation rules’. These rules allow small businesses to immediately deduct assets costing less than $1,000. Any assets of $1,000 and over can be added together (‘pooled’) and depreciated at the same rate. These assets are depreciated at 15 per cent in the first income year, and 30 per cent per year thereafter.
What is changing?
The threshold for immediate deductibility will be raised to $20,000 from 7.30pm 12 May 2015. The increased threshold is proposed to apply until 30 June 2017. The threshold for the low pool value rules will also be increased to $20,000.
What does this mean?
This means that a small business will be able to immediately deduct each and every depreciating asset that they purchase with a cost below $20,000. For assets costing $20,000 or more, businesses will need to use the pooling arrangements and depreciate these assets at 15 per cent in the first year and 30 per cent each year thereafter.
The low pool value threshold will also change so that if at the end of the income year the balance of the pool falls below $20,000 it can also be immediately deducted.
These changes are intended to apply for the period from 7.30pm 12 May 2015 to the end of 30 June 2017.
What does this mean for businesses that have opted-out of the simplified depreciation arrangements?
To ensure fairness and maximum eligibility for the new concessions, as a once off, small business entities that have previously elected out of the concessions will not be subject to the ‘lock-out’ rule but will instead be able to elect to use them immediately if they choose to do so.
How will this be monitored?
The rules around asset eligibility do not change. That is if an asset was eligible for immediate deductibility under the current $1,000 it will continue to be deductible under the new $20,000 threshold.
However, to ensure the proposal operates as intended, the ATO will engage with small businesses based on their behaviour and choices. This will include providing clear guidance so that businesses intending to utilise the provisions find it as easy as possible to do so.
If small businesses exhibit behaviours that indicate a high level of risk, they can expect a higher level of interaction with the ATO. The ATO has a risk-based program to identify taxpayers that are not meeting their obligations and will take measured approaches to influence taxpayer behaviour.
Are all assets eligible?
All assets (including new and second hand) will be eligible, except for a small number of exclusions which receive different depreciation treatment.
Excluded assets include:
Horticultural plants – subject to their own ‘uniform capital allowance’ rules (UCA);
Capital works – subject to their own ‘capital works’ depreciation rules;
Assets allocated to a low-value or software depreciation pool – subject to the depreciation rules under those pools;
Primary production assets – you can choose to use the specific UCA rules or accelerated depreciation rules; and
Assets leased out to another party on a depreciating asset lease.
Businesses need to ensure that they only claim a deduction to the extent to which the asset is used in an income earning activity.
Are old/second hand assets eligible?
Yes, both new and old/second hand assets remain eligible.
How can I find out more about the current rules and eligible assets?
For information about the operation of the current rules and assets that are eligible to be deducted under the current instant asset write-off threshold you can phone 13 28 66.