Managing costs

Asset depreciation: Here's how it works

If your business has accumulated any assets or you’re looking to acquire assets, you should understand how you can claim them as a deduction. Let’s unpack this for you but remember to talk to your accountant for tailored advice. 

To get started, you need to quantify the total cost of the asset and then know how much of the total cost of each asset you can write off over time. This will depend on the asset’s value and longevity. This type of tax deduction is called ‘depreciation’. It’s a way for businesses to reduce 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. Each should have characteristics in common that they are expected to decline in value and only have an expected useful life span. Eligible assets 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.

Instant asset write-off

This allows eligible small businesses to claim an immediate deduction for the business portion of the cost of the asset first used or installed between 12 March 2020 and 30 June 2021 and purchased before 31 December 2020.

The threshold amount for each asset is $150,000.  Only businesses with an annual turnover of under $500 million are eligible for the instant asset write-off.

Temporary full expensing

To help increase cash flow and encourage small business investment, the federal government has introduced and extended temporary full expensing.  This applies to businesses with a turnover under $5 billion who have purchased new or second-hand assets. To qualify, the assets must have been purchased after 7.30pm AEDT on 6 October 2020 and by 30 June 2023 and be used for generating an income.

The temporary full expensing provisions allow for an immediate deduction of the full cost of eligible assets. In addition, businesses with a turnover under $10 million can claim the balance remaining in their company’s small business pool at the end of each income year during this period.

You can opt-out of temporary full expensing for an income year on an asset-by-asset basis if you are not using the simplified depreciation rules. 

Simplified depreciation for small business

If you run a small business and use the simplified depreciation rules, you can apply the temporary full expensing rules with some modifications. Find out how to use the simplified depreciation rules.

Before making any big purchases, consider whether the asset will help grow your business. It’s best to seek professional advice to help you assess benefits to the business, and determine what impact it will have on your future finances and cash flow.

How to get your business tax time ready

Do you understand your tax obligations? Gain valuable tips and exclusive industry expert guidance on how to navigate your business’s tax affairs and plan for a changing future in our free webinar with CPA Australia and the ATO's Assistant Commissioner.

Already a member? Get started