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Simplified depreciation for SMBs explained

by Samuel Williamson

3 min read

Nobody likes paying more tax than they should. One way to curb your liability without bending the law is to take advantage of the Australian Taxation Office’s (ATO’s) simplified depreciation rules: a must-know for small businesses.

The hard rules to using simplified depreciation

You can choose to use the ATO’s simplified depreciation rules if your business has an aggregated annual turnover (the total income raised by your business and any associated enterprise) of less than $2 million.

Under these rules, you can either:

  • Immediately write off or claim the full cost of most depreciating assets costing less than $20,000 (the current instant asset write-off threshold) in the year you buy them, or
  • Pool your other depreciating assets and claim:
    o a 15% deduction in the first year
    o a 30% deduction each year after the first year

There are several benefits to using the simplified method when calculating your depreciation.

Instant undercut

The instant asset write-off rule means you can essentially deduct the asset’s full cost if it was purchased and used, or installed, from 7.30pm on 12 May 2015 to 30 June 2018.

Before 12 May 2015, the instant asset write-off threshold was just $1000, so this year is your year to save on big-ticket item purchases such as office furniture, computers, vehicles and more.

Bust the budget

If the assets you buy are over the threshold ­– costing $20,000 or more – you can put them in a small business asset pool and claim a 15% deduction in the first year. Plus, double that – a 30% deduction – on big-ticket assets is yours for the taking each year after that.

If, before applying any other depreciation deduction, your pool balance is under $20,000, you can write it off at the end of an income year.

Simplified in practice

For more insight into how the main rules pan out, meet the theoretical Fitzroy entrepreneur Ming. Ming has just opened a gaming cafe called Frag, which needs some hefty asset investments.

Suppose that Ming decides to arm Frag with a bank of nifty new computers for a whopping $30,000 in the 2016 tax year. When completing his BAS for that tax year, Ming can claim a deduction of $4500 ($30,000 x 15%) – a significant discount on the businesses income tax return.

Options and exclusions

Of course, if Ming buys a bank of computers for a comparatively modest price – say $17,000 – he will fare even better. In this example, Ming can use the instant asset write-off rule and deduct their full cost.

The more you’re able to deduct using the simplified depreciation rule, the better your cash flow to help your small business stay afloat. Accounting software like QuickBooks Online can also help give you more visibility over your business’s finances, and can even help you calculate depreciation values or track pooled assets.

Just remember that some assets are excluded from the ATO’s reckoning. For example, among other things, horticultural plants including grapevines have special rules, as do assets allotted to a software development pool.

A good time to buy

The new simplified depreciation method gives small business owners a strong incentive to invest in new assets, or ‘depreciation provisions’.

These wallet-friendly provisions can reduce the likelihood of buyer’s remorse, if your business has a place for that fancy new company car, coffee machine or air-conditioning unit.

You should, however, only buy assets that align with your business’s vision and serve a purpose. If they do, you should notice a positive impact on growth – which is the point.

A benefit to all

The ATO wants you to reinvest in your business and grow by upgrading or replacing machinery and equipment.

In turn, the wider economy should thrive in a good feedback loop, yielding more opportunity for all, as Australia evolves beyond the mining boom. The implications of the new rules go way beyond instant gratification, although the immediacy angle is a powerful draw. Why not seize the moment if you can?

To read more articles about Small Business Tax, visit here.

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