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Small Business Tax Depreciation

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Last editedNov 20212 min read

One way to make the most of tax deductions for your small business is by taking advantage of the business depreciation rules offered by the Australian Tax Office.

But you might be a little bit confused about how this is done, and have a lot of questions, such as what is tax depreciation? Is depreciation tax deductible?

In this guide, we’ll take you through how small business tax depreciation works in Australia. That way you can be in the know and look forward to potentially saving thousands of dollars.

Tax depreciation explained

Depreciation is one of the trickier terms to get your head around in accounting. However, it’s something every small business owner needs to be familiar with.

Simply put, depreciation is the reduction in value of a tangible asset. For example, the value of a new car steadily decreases over time the more it is used. This is depreciation, and it applies to any asset purchased for your business. This includes a commercial space and the various assets within it which are used for the running of your business.

The Australian Tax Office (ATO) allows business owners and property investors, who use their properties to generate income, to claim depreciation as a tax deduction.

In order to simplify the process of claiming tax deductions, the ATO provides two options for small businesses: the simplified depreciation rules or the general depreciation rules. In order to qualify for the simplified rules, you must be a small business entity. So, before we outline what both sets of rules entail, let’s go through small business entities.

What is a small business entity?

Whether or not a business qualifies as a small entity or not depends on its annual aggregated turnover.

In order to be eligible for the simplified depreciation rules, a business needs to have an annual aggregated turnover of:

  • $10 million (from 1st July 2016 onwards); or

  • $2 million for the previous income years.

Simplified small business tax depreciation rules

If your business is a small entity then you are eligible for the simplified depreciation rules. These include:

1. An instant asset write-off for assets with a value lower than the relevant threshold.

This means that you can claim a deduction equal to the amount an asset has decreased in value while being used by the business.

In light of the COVID-19 pandemic, the threshold amount for a depreciating asset has increased.

2. A general small business pool, with simplified calculations to determine the depreciation deduction.

This means that businesses can pool together the higher costing assets in order to claim depreciation deductions at a more accelerated rate.

Example of small business tax depreciation

James bought a delivery van on 6th January 2020 for $70,000. He also bought assets for the truck, including portable ramps and lifting equipment for the business pool.

At the end of the financial year, his small business pool totalled $150,000.

At the time, James’ assets totalled a higher sum than the threshold was $30,000. This means he doesn’t qualify for an instant asset write-off.

However, as the assets were for business purposes, he qualifies for a 15% deduction.  

His small business depreciation deduction calculation is therefore:

$150,000 x 15% = $22,500

This means James can claim a depreciation tax reduction of $22,500.

Tax depreciation explained: key takeaways

The ATO has made claiming small business depreciation tax easier with their simplified depreciation rules. This can help small businesses to maximise their cash flow and provide tax relief.

These simplified rules are eligible for small business entities and include:

  • The instant asset write off;

  • The general small business pool.

To help small businesses out during the economic difficulties caused by the coronavirus pandemic, the Australian Government has made several changes to the instant write-off rule to make it more accessible.

As a small business, make sure you are taking full advantage of the simplified depreciation rules so that you can save the maximum amount of money from depreciation as a tax-deductible expense.

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