A Re-Cap On Small Business Depreciation Rules

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29
Aug

A Re-Cap On Small Business Depreciation Rules

29.08.16

The Small Business Simplified Depreciation (“SBSD”) rules allow small business entities (classified as having an aggregated annual turnover of less than $2 million) to simplify the way they approach depreciation on their business assets.  While the rules are nothing new, there are a number of important issues to be aware of when utilising the SBSD rules.

 

WHAT ARE THE RULES?

There are three key components of the SBSD rules, outlined below.

 

Immediate Write-Off Threshold: Under the SBSD rules, a business may write off new assets purchased (after 12 May 2015) that cost up to $20,000 (this is the total cost and not just the business percentage). This $20,000 threshold is valid for purchases up to 30 June 2017, where the threshold amount is currently set to return to $1,000.

 

Pooling of Assets: Once an entity has elected to use the SBSD rules, all of their business assets must be ‘pooled’ together at their written-down-value (WDV), where they will be depreciated at a fixed rate as a whole. Similarly, any new assets purchased once the SBSD rules have been adopted that cost more than the $20,000 threshold will be added to the pool. SBSD pooled assets are depreciated at 15% in the first year and 30% each year after the first year.

 

Balance Write-Off Threshold: The entire balance of the SBSD pool can be written-off when the total WDV becomes less than $20,000 – this is before any depreciation entries are applied.

 

WHAT ARE THE ISSUES?

It is important for small business owners to be aware of the following issues when using the SBSD rules:

  • Once a business elects to use the SBSD rules, they must use all of the rules and not simply ‘pick’ certain parts of the rules to use on certain assets.  For example, a business cannot write off assets selectively using the $20,000 immediate asset threshold without pooling the balance of their assets.
  • Businesses need to ensure that they are classified as a ‘Small Business Entity’ – ensuring that the annual aggregate turnover is under $2million –this includes the income of your business and all associated businesses.
  • Once a business elects to use the SBSD rules, they can opt-out of using the rules, but will be ‘lock-out’ from switching back to the SBSD rules for a period of 5 years. However, those businesses who changed their depreciation method prior to 2015 have had their ‘lock-out’ period extinguished, allowing them to opt back in to utilise the temporary $20,000 thresholds.

 

This simplified scheme is essentially allowing businesses to ‘accelerate’ what would otherwise be a deduction over a longer period of time (the asset’s life). Immediately writing assets off is simply bringing forward the full deduction into this year, which may not always be the most tax effective option. 

 

Should you have any questions in relation to the above, or small business depreciation in general, please contact us or call you ESV engagement partner on 02 9283 1666.

 

Article by Nathan Rossini