How to Maximise Your Tax Savings as a Small Business Owner in Australia
Thanks to the Australian Taxation Office (the ATO), small businesses are entitled to several tax incentives – and one of the most significant of those incentives is depreciation.
Provided your small business meets the qualification criteria (in other words, you are considered a small business entity), you could possibly save your business thousands of dollars each financial year.
So, here is what you need to know about the simplified small business depreciation rules, what you are entitled to claim, and how to maximise your deductions.
What Is Tax Depreciation?
Before delving into how to claim your tax deductions, it is important to have a basic understanding of what small business depreciation is.
As a commercial building ages, its structure and assets are subject to general wear and tear. The same applies to assets that can be found within the building and any plant and equipment you use as part of your business operations. Because of the general wear and tear, the value of the building and relevant assets decrease in value and thus, depreciate.
But, for business owners and property investors, depreciation isn’t all bad. This is because the ATO allows you to claim this depreciation as a tax deduction, which could significantly reduce your tax bill.
For small business entities, in particular, there are a few simplified depreciation rules to make the process of claiming these deductions easier. However, you will have to meet certain eligibility criteria.
Small Businesses: Eligibility To Use Simplified Depreciation Rules
To qualify to make use of the ATO’s simplified depreciation rules, your small business must have an annual turnover of:
- $10 million (from 1 July 2016 onwards), or
- $2 million for the previous income years.
Choosing To Use the Simplified Rules
Using the simplified depreciation rules (which we will discuss below) is entirely up to the business entity and what suits their circumstances. The main difference between the simplified rules and the general rules is that small business owners can claim deductions sooner with the simplified depreciation rules.
Should you decide to take advantage of the simplified claim, there are a few factors you need to be aware of:
- The rules will apply to all the business depreciable assets
- You must apply all the rules, not just the ones you deem appropriate
- You can only claim deductions for the portion of the asset that’s used to carry out your business. In other words, you can’t claim a depreciation deduction on the portion of the asset that you use privately.
So, What Are the Simplified Depreciation Rules?
The simplified small business depreciation rules include:
- Instant asset write off
- General small business pool
The Instant Asset Write Off Rule
The instant asset write-off rules allow business owners to claim a depreciation deduction for an asset in the same year that they first used it or installed it. Previously, the instant write-off rule was only applicable to assets (including second-hand assets) that fell within the ATO’s threshold.
For example, before 12 March 2020, owners were only entitled to use the rule if the cost of the asset was $30,000 or less. However, from 12 March 2020 until 31 December 2020, the threshold amount increased to $150,000.
Beyond the asset threshold amount, businesses couldn’t have a turnover higher than $50 million. However, that too increased to cover businesses with a turnover of less than $500 million.
Following the economic crisis brought on by the worldwide coronavirus pandemic, the government, once again, made changes to the eligibility criteria and made the instant asset write-off scheme available to more businesses across Australia.
The updated scheme has been effective since 6 October 2020 and will apply until 30 June 2022:
- businesses with an aggregated annual turnover of up to $5 billion can now immediately claim a depreciation deduction for eligible assets as well as the full cost of improvements to existing assets, and
- the total cost of the asset can be claimed, so there is no threshold amount.
This means that until 30 June 2022, this limitless instant asset write-off will override all other previous instant asset write-off schemes.
The General Small Business Pool
Another simplified rule that allows business owners to claim their depreciation deductions at an accelerated rate is the general small business pool. The rule essentially allows business owners to pool their higher costing business-use assets together and claim:
- a 15% deduction in the year that you started using the asset or installed it ready to be used, and
- a 30% deduction each year after the first year.
Generally, higher-cost assets are classified as those that cost more than or equal to the relevant instant asset write-off threshold. And once the pool balance is less than the threshold, business owners can deduct the entire balance of the pool at the end of the income year.
However, whilst the current instant asset write off scheme is in place, the small business pool is only used for businesses with a turnover of over $5 billion per year.
As a small business, you should ensure that you take advantage of the simplified depreciation rules as depreciation is a significant tax-deductible expense.
If you feel unsure about the small business depreciation rules, you may find it helpful to purchase a tax depreciation schedule.
A tax depreciation schedule is a report that details the tax depreciation deductions you can claim on your small business assets. You can order one from a qualified quantity surveyor.
Author: Tuan Duong
Tuan is the Principal and Founder of Duo Tax Quantity Surveyors. His passion is to educate property investors on the power of tax depreciation and the benefits it can offer in helping them minimise their tax liability. Tuan is also a professional member of the Australian Institute of Quantity Surveyors and is a Registered Tax Agent, authorised to offer advice on all matters related to depreciation.