The Australian Government have introduced a time limited, 15 month investment incentive to support business investment and economic growth over the short term, by accelerating depreciation deductions.
Businesses with an aggregated turnover of less then $500 million for the 2019-20 and 2020-21 income years are eligible to deduct the cost of depreciating assets at an accelerated rate.
For each new asset, the accelerated depreciation deduction applies in the income year that the asset is first used or installed ready for use for a taxable purpose. Your client can claim the deduction when lodging their tax return for the income year. The usual depreciating asset arrangements apply in the subsequent income years that the asset is held.
For the asset to be eligible, it needs to meet the following criteria:
- be new and not previously held by another entity (other than as trading stock)
- be first held on or after 12 March 2020
- first used or first installed ready for use for a taxable purpose on or after 12 March 2020 until 30 June 2021
- not be an asset to which an entity has applied the instant asset write-off rules or depreciation deductions.
Eligible assets do not include:
- second-hand depreciating assets
- some specific Division 40 assets subject to low value and software development pools
- certain primary production assets
- buildings and other capital works for which you can deduct amounts under Division 43
- other specific capital asset and expense deductions
- assets you were committed to acquiring before 12 March 2020.
For eligible businesses, under the measures, different rules apply depending on whether an entity is using the simplified rules for capital allowances for small businesses.
If your client is a small business with an aggregated turnover of less than $10 million, and they use the simplified depreciation rules, those assets over the instant asset threshold which are eligible for the accelerated depreciation are added to the general small business pool. They can deduct an amount equal to 57.5% (rather than 15%) of the business portion of a new depreciating asset in the year you add it to the pool. In later years the asset will be depreciated under the general small business pool rules.
If your client is an entity with aggregated turnover less than $500 million in the income year and do not use the simplified depreciation rules, they may be eligible to deduct an amount if the asset is a qualifying asset.
The amount the entity can deduct in the income year the asset is first used or installed ready for use is:
- 50% of the cost (or adjustable value where applicable) of the depreciating asset
- plus the amount of the usual depreciation deduction that would otherwise apply but calculated as if the cost or adjustable value of the asset were reduced by 50%.
Effectively, together with the instant asset write-off rules, the accelerated depreciation deduction applies to assets with a cost (or adjustable value if applicable) of:
- $150,000 or more in the 2019–20 income year
- $1,000 or more in the 2020–21 income year.
Please see examples below, or you can find more information here.
Example 1 – Small business benefits from accelerated depreciation
Joan and Bruce own a company, NC Transport Solutions Pty Ltd, through which they operate a haulage business on the North Coast of New South Wales. NC Transport Solutions Pty Ltd has an aggregated annual turnover of $8 million for the 2019–20 income year. On 1 May 2020, Joan and Bruce purchase a new truck for $260,000, exclusive of GST, for use in their business.
Under past tax arrangements, NC Transport Solutions Pty Ltd would depreciate the truck using their general small business pool. This means that NC Transport Solutions Pty Ltd would deduct 15% of the asset’s value when they added it to the pool, leading to a tax deduction of $39,000 for the 2019–20 income year (assuming there are no other assets in the pool).
Under the new accelerated depreciation, NC Transport Solutions Pty Ltd will instead claim a deduction of 57.5% when they add it the pool, leading to a deduction of $149,500 for the 2019–20 income year.
Example 2 – Middle-sized business benefits from accelerated depreciation
J Construction Solutions Pty Ltd has an aggregated annual turnover of $200 million for the 2020–21 income year. On 1 July 2020, J Construction Solutions Pty Ltd installs a $1 million truck mounted concrete pump for use in the business.
Under past tax arrangements, in the first year J Construction Solutions Pty Ltd could claim 30% depreciation when using the diminishing value method (based on the asset’s effective life of six and two thirds years).
Under the new accelerated depreciation, J Construction Solutions Pty Ltd can claim a depreciation deduction of $650,000 in the 2020–21 income year. This consists of 50% of the concrete pump’s value under the new accelerated depreciation ($500,000) plus 30% of the remaining $500,000 under existing depreciation rules ($150,000).