Managing costs

Asset depreciation: Here's how it works

With tax time approaching, your small business may have accumulated some assets during the year that you would like to claim as a deduction.

But to do this, you’ll need to know how much of the total cost of each asset you can write off over time, sometimes years, depending on the asset’s value and longevity. This tax deduction is called ‘depreciation’. It’s a way for businesses to reduce their tax obligations on assets that lose value over time due to wear-and-tear or obsolescence.

Types of assets you can claim

There are many types of assets you can write off, but what they should have in common is that they are expected to decline in value. This can include:

  • hand tools, power tools and safety equipment
  • computer hardware and software
  • office furniture such as chairs, desks and filing cabinets
  • other plant and machinery used by the business.

The cost of an item includes the initial purchase price, plus any additional costs involved in transporting it and setting it up for business use. Eligible assets can be purchased new or second-hand.

Changes to the instant asset write-off threshold

The instant asset write-off allows you to write off the value of eligible assets in the year they were purchased – provided they were also first used (or installed for use) in the income year you are claiming for.

How much you can claim is set by the instant asset write-off threshold. As part of the government’s COVID-19 tax relief initiatives, the threshold amount for each asset has been increased to $150,000 for the period 12 March 2020 to 30 June 2020 (up from $30,000). During the same period, businesses with an annual turnover of under $500 million are eligible for the write-off, an increase from $50 million.

This is the latest in a series of threshold increases, applicable to assets purchased as early as July 2012. These can be checked on the ATO website

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Note: the threshold will reset back to $1,000 from 1 July 2020, and only apply to businesses with under $10 million turnover.

Depreciation for items above the threshold

The instant asset write-off threshold applies to the total cost of the asset and not just its taxable portion. It also only applies to assets which are eligible for the simplified depreciation rules. If the cost of the asset exceeds the instant asset write-off threshold, the asset will need to be placed in the small business asset pool, where you can claim partial deductions (or depreciations) each year.

These assets are to be written off over the effective life of the asset, which varies according to the type of asset involved. The ATO releases a list of these effective lifetimes each year, the most recent being TR 2019/5. Depreciation can be calculated using two methods:

  • Prime cost (or straight line), where the value decreases uniformly over its effective life.
  • Diminishing value, where its value decreases faster in its first few years.

While the diminishing value method will give you bigger deductions earlier, it may be best to seek advice from your financial advisor before deciding which depreciation method to choose in your circumstances.

Should you take advantage of the new rules?

The large increase in the instant asset write-off threshold means many assets that previously needed to be depreciated can be written off fully in their year of purchase.

Before making any big purchases, however, you may want to seek professional advice to help you assess its benefits to the business, and determine what impact it will have on your future finances and cash flow.

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