Managing costs

What is accelerated depreciation? 

As businesses prepare for the end of financial year (EOFY) 2020, it’s useful to understand some recent changes that might affect your tax return. One of these may be the new accelerated depreciation measures. Here, we look at what accelerated depreciation means, how it works and what benefits it could have for your business.

What is accelerated depreciation?

As of March 2020, the new accelerated depreciation measures provide an incentive to businesses with aggregated turnover of less than $500 million for the 2019–20 and 2020–21 income years.

The idea behind the scheme is to allow businesses to deduct the cost of depreciating assets at an accelerated rate through their tax return for the respective tax year to stimulate business investment and economic growth.

In the past, businesses could only claim spending on capital assets over time. However, the new accelerated depreciation measures mean that certain businesses are eligible for an instant asset write-off plus an increased percentage deduction.

How does accelerated depreciation work?

Accelerated depreciation means you can deduct costs for eligible depreciating assets in your tax return at varying percentages. For a medium-sized business, you can deduct 50% of the cost of your asset in the income year it has been first used or installed ready for use. You can also use existing depreciation measures for the same asset.

For example, if your business has an annual turnover of $200 million for the year 2020–2021 income year and you install a $1 million truck-mounted concrete pump for the business, you can claim 50% ($500,000) of the concrete pump’s value under the new accelerated depreciation. In addition, you’ll be able to claim 30% ($150,000) of the remaining $500,000 under existing depreciation rules.

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Depending on your asset, there are also immediate write-off options you could take advantage of – for example, for items costing up to $100 that are used to earn business income and items costing up to $300 that are used to earn income other than from a business.

Accelerated depreciation for small businesses

Small businesses can also benefit from accelerated depreciation measures, however, they may opt to use simplified depreciation rules. The main difference between the general and the simplified rules are changes to capital works and other business capital expenses such as project-related expenses, which you can write off over a longer period.

For a small business with a turnover of less than $10 million, the simplified depreciation rules mean the assets over the instant asset threshold are added to the general business pool.

This means you can deduct 57.5%, rather than 15%, of the business portion of a new depreciating asset in the year it’s added to the pool. In the years following, the asset will fall under the general small business pool rules.

For example

If you have a haulage business with an aggregated turnover of $8 million for the 2019–2020 income year and you bought a new truck for $260,000, you’d be able to claim $149,500, or 57.5%, of the cost of your asset, when added to your pool.

Under past rules, your business would use the small business pool to depreciate the vehicle. This means you’d deduct 15% of the asset value, and have a tax deduction of $39,000

As Australia moves through the economic downturn caused by the coronavirus crisis, measures like these can make a big difference for small and medium-sized businesses, so it’s worth checking how your business could benefit.

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*Based on 958 meters switched between 1 July 2019 to 3 April 2020