Source: New places to play in Gungahlin
Small business depreciation pool
If you choose to use the simplified depreciation rules, any depreciating assets for which you can’t claim an immediate deduction under instant asset write-off or temporary full expensing, are allocated to a small business depreciation pool.
This includes assets that:
- cost the same as, or more than, the instant asset write-off limit amount.
- you held before you used the simplified depreciation rules (other than excluded assets).
You claim:
- a 15% deduction for these assets in the year they are allocated to the pool (regardless of when the asset was purchased during the year).
For certain new assets of $150,000 or more first held from 12 March 2020 to 7:30 pm AEDT 6 October 2020, you can use an accelerated depreciation rate of 57.5% under Backing business investment – accelerated depreciation when you first add them to the pool.
Low pool value – instant asset write-off
If the balance of the small business pool (after applying the following adjustments) is less than the instant asset write-off limit, you can immediately write off the entire pool balance and claim the amount as a deduction. However, for income years ending between 7:30 pm AEDT on 6 October 2020 and 30 June 2023, you deduct the entire balance of the small business pool (there is no limit for that period).
These steps show what you need to do when using a small business pool:
- Start with the opening balance for the current year.
- Add the business portion of the adjustable value of assets you acquired and started to use in the current year.
- Add the business portion of cost additions to the pool in the current year.
- Subtract the business portion of proceeds (including insurance payouts) of any assets disposed of in the current year.
Example 1: pool balance under the instant asset write-off limit
Having purchased a car for $18,000 on 2 August 2023, Brendan estimates that it is used 50% for business purposes. As the cost of the car is under the relevant instant asset write-off limit (that is $20,000), Brendan writes it off in the year that it was first used or installed ready for use. His deduction is $9,000 as he only claims for the proportion the asset is used in earning income.
If the purchase price of the car was $28,000 and Brendan estimated the car would be used 50% in his business, he would place $14,000 for the car in his small business pool and depreciate 15% in the first year. The asset is still placed in the small business pool because the cost of the asset before determining the business portion exceeded the relevant instant asset limit.
End of example
Example 2: simplified depreciation – small business pool for 2018–19 income year
Loretta bought a trailer for her event management business on 1 December 2018 for $15,000 and a second larger trailer on 2 February 2019 for $28,000. She also sold an old trailer that was previously in her small business pool for $8,000. Loretta had an opening pool balance of $100,000 from the previous year.
Loretta will:
- immediately write-off the cost of the first $15,000 trailer (as it is under the $20,000 instant asset write-off limit which applied at the time she purchased and started to use the trailer)
- calculate her depreciation deduction for pool assets by
- adding the cost of the $28,000 larger trailer to her small business pool (as it is over the $25,000 limit which applied at the time she purchased and started to use the larger trailer).
- deduct the $8,000 received from the sale of the old trailer from her small business pool.
Table 1: Calculation of small business pool balance for 2018–19 income year.
Table 1: Calculation of small business pool balance for 2018–19 income year.
|
Calculation item
|
Pool balance
|
Depreciation claim
|
|
Closing pool balance from previous year
|
$100,000
|
n/a
|
|
Opening pool balance for current year
|
$100,000
|
n/a
|
|
Add: New asset purchase
|
$28,000
|
n/a
|
|
Subtotal
|
$128,000
|
n/a
|
|
Less: Proceeds of asset sale or disposal
|
−$8,000
|
n/a
|
|
Subtotal
|
$120,000
|
n/a
|
|
Pool deduction claim (30% of $100,000)
|
−$30,000
|
$30,000
|
|
Subtotal
|
$90,000
|
n/a
|
|
New asset deduction claim (15% of $28,000)
|
−$4,200
|
$4,200
|
|
Total depreciation for current year
|
n/a
|
$34,200
|
|
Closing pool balance for current year
|
$85,800
|
n/a
|
|
Opening pool balance for next year
|
$85,800
|
n/a
|
Loretta’s depreciation claim for the 2018–19 income year is:
- deduction for instant asset write-off: $15,000
- deduction for small business pool: $34,200.
Loretta’s closing pool balance for the year is $85,800. This will be her opening pool balance for next year.
Figures exclude GST.
End of example
Example 3: simplified depreciation – small business pool for 2019–20 income year
Loretta bought a new car to use for her business on 15 January 2020 for $33,000. The car was delivered on 31 January 2020. Loretta can’t immediately write off the cost of the car as the limit was $30,000 at the time she started to use the car. She needs to allocate the car to her small business pool.
Loretta’s 2019–20 income year ends 30 June 2020. Calculation of small business pool balance for 2019–20 income year.
Table 2: Calculation of small business pool balance
|
Calculation item
|
Pool balance
|
Depreciation claim
|
|
Closing pool balance from previous year
|
$85,800
|
n/a
|
|
Opening pool balance for current year
|
$85,800
|
n/a
|
|
Add: New asset purchase – car
|
$33,000
|
n/a
|
|
Subtotal
|
$118,800
|
n/a
|
Before applying the depreciation deductions, the balance of the pool at the end of income year is $118,800. From 12 March 2020, the instant asset write-off limit increased to $150,000. As the balance of the pool is less than the limit at the end of the income year, Loretta will write off the entire pool balance in her 2019–20 income tax return.
Loretta’s closing pool balance for the year is $0.
Figures exclude GST.
End of example
Calculating pool events
These steps show what you need to do when using a small business pool.
Step 1: Work out your opening balance
If you’ve been using the simplified depreciation rules, the opening balance of your small business pool for the current year is the closing balance from the previous year.
For the year in which you first start using these rules you need to work out the opening balance of the small business pool. To do this you need to work out:
- the value of your assets (adjustable value) – that is, the cost of each asset (excluding any GST paid if you’re registered for GST), including improvements, less how much it has depreciated since you first started using it, regardless of whether the use was private or business
- the proportion used to earn assessable income (taxable purpose proportion) – that is, the estimated percentage of use of the asset in earning assessable income (as against private use).
For each asset, the amount you include in the small business pool is:
Adjustable value × taxable purpose proportion
Example 4: calculating the opening balance
Before using the simplified depreciation rules, Fiona held the following depreciating assets that she used in her business in 2014. All of these needed to be placed into her small business pool. She calculated the amount to include as follows:
- a station wagon with an opening adjustable value of $38,000 (which Fiona estimated she uses 70% of the time in her business), for which she calculated the amount to include in the pool as $38,000 × 70% = $26,600
- a computer with an opening adjustable value of $3,000 (which Fiona estimates she used 70% of the time in her business), for which she calculated the amount to include in the pool as $3,000 × 70% = $2,100
- a refrigerated cabinet with an opening adjustable value of $1,500 (which Fiona used solely for the business), for which she calculated the amount to include in the pool as $1,500 × 100% = $1,500.
These assets were allocated to the small business pool, with an opening balance of $30,200.
As they were depreciating assets used in the business in a previous income year, they were included in the opening pool balance and depreciated at a rate of 30% of the taxable purpose proportion of their adjustable value.
End of example
Step 2: New assets and cost additions
Add any new or second-hand assets you acquired during the current income year at a cost equal to or above the instant asset write-off limit, and any cost addition amounts to existing assets.
Cost addition amounts are:
- amounts you’ve spent on improving the assets
- the improvement amounts added to the pool need to have the same taxable purpose proportion applied as that applied to the asset
- if you made the improvements to the asset in the same income year that you acquired it, the amount simply becomes part of the original cost of the asset
- improvement costs that are under the instant asset write-off limit are immediately written-off if they apply to an asset that had been written-off in a previous year, with any further improvements placed into the small business pool
- costs incurred when disposing of, or permanently ceasing to use, an asset (including advertising and commission costs or the costs of demolishing the asset).
Note: You don’t add to your small business pool:
- assets that you purchased and first used, or had installed ready for use, for a taxable purpose between 7:30 pm AEDT 6 October 2020 and 30 June 2023. You can claim an immediate deduction for the business cost of these assets
- the cost of improvements made from 7:30 pm AEDT on 6 October 2020 to 30 June 2023 to an asset that you have written off under the simplified depreciation rules (including instant asset write-off) in an earlier income year, provided you have not previously claimed improvement costs to the asset. You can claim an immediate deduction for the business portion of the improvement cost and no limit applies. Any later improvements are added to the small business pool.
Example 5: improving your assets
You purchased a car for $15,000 that you estimate is used 50% in your business in the last income year and claimed $7,500 as an instant asset write-off deduction.
This year you added a tow ball to the car for $300 so you can use a trailer to move around stock in your business. You instantly write-off the tow ball as it falls under the instant asset write-off limit, but you can only claim $150 (50%), as the claim is limited to the proportion of the original asset that is used in earning assessable income.
End of example
Step 3: Asset sales and disposals
If you’ve sold or ceased to use an asset in the current income year, you need to reduce your pool balance by the asset’s termination value multiplied by the taxable use proportion.
The termination value could be money you received from selling an asset (including by way of trade-in), or the insurance payout you received as the result of its loss or destruction.
If you used the asset 100% for business, reduce the pool balance by the whole termination value.
If the asset had a portion of private use, reduce the pool balance using the following formula:
Termination value × Taxable purpose proportion
If the value of the small business pool is less than the instant asset write-off limit after you’ve made adjustments for any acquisitions, sales or disposals, and before calculating any depreciation deductions for the pool as a whole, the whole small business pool balance must be written-off in that year.
You deduct the balance of the small business pool at the end of an income year ending between 6 October 2020 and 30 June 2023. The pool’s closing balance for the income year is zero after full expensing.
If you’re transferring assets to another entity as part of a business restructure, you may be entitled to rollover relief, under which you don’t subtract the termination values of the depreciating assets from the closing balance of the small business pool.
Assessable income adjustment
If you’ve sold or disposed of an asset, you may also need to include an amount in your assessable income to allow for any excess between what you receive for the asset over what you’ve claimed as a depreciation deduction – as follows:
- If you sell or otherwise dispose of an asset that has previously been fully written off, you also need to include its termination value multiplied by its taxable purpose proportion in your assessable income.
- If you sell or otherwise dispose of an asset that formed part of a low pool value that has been previously written-off, you need to subtract the taxable purpose proportion of the asset’s termination value in calculating the closing pool balance. If the balance (after acquisitions, cost additions and this adjustment) results in a negative amount, this amount must be included in your assessable income, and the pool’s closing balance becomes zero.
- If you sell or otherwise dispose of an asset that has not been fully written-off, you subtract the taxable purpose proportion of the proceeds of the disposal from the pool balance, and if the result after acquisitions and cost additions is
- equal to or more than the instant asset write-off limit, the amount is the pool’s closing balance
- less than the instant asset write-off limit but more than zero, the amount is claimed as a deduction and the closing balance becomes zero
- negative, the amount less than zero is included in your assessable income.
Note: You deduct the balance of the small business pool at the end of an income year ending between 6 October 2020 and 30 June 2023. The pool’s closing balance for the income year is zero after full expensing.
You don’t incur a capital gains liability for the disposal of a depreciating asset that you’ve depreciated under the simplified depreciation rules.
Example 6: disposing assets
During the 2023–24 income year, Fiona disposes of the following assets:
- Her old refrigerated cabinet, sold for $1,000 on 1 April 2024 with the full amount included in her small business pool as this asset was used solely in her business.
- Her station wagon, traded in for $10,000 on a new delivery van on 1 May 2024 – the station wagon was used 70% for business purposes, so the formula she uses is the termination value by the taxable purpose proportion ($10,000 × 70% = $7,000).
Fiona must reduce the closing pool balance for the 2023–24 income year by $8,000 as a result of the sale of these assets.
End of example
Asset disposal where business use has changed
If you dispose of an asset and there has been a change in how much it was used in your business during the time it was in your small business pool, you must also adjust the taxable purpose proportion of the asset’s termination value. You work out the average proportion (taxable purpose proportion) you used the asset in your business during the income years in which the asset was in the pool.
Example 7: adjusting the value of a disposed asset
Maria added her car to the pool in 2016–17 and used it 60% for business. She increased her business use of her car from 75% to 90% in the 2018–19 income year. She sold her car for $3,000 at the start of the 2019–20 income year.
Maria must average the estimate of her business use of the car for the year in which it was allocated to the pool and the next 3 years, as follows:
- 60% (2016–17 original estimate) business use
- 75% (2017–18 estimate) business use
- 90% (2018–19 estimate) business use
- 90% (2019–20, no change from previous year) business use.
The average for business use is 79% = (60% + 75% + 90% + 90%) ÷ 4.
The taxable purpose proportion of the car’s termination value is the termination value by the average business use:
$3,000 × 79% = $2,370.
Maria reduces the closing pool balance for the disposal of the car by $2,370.
End of example
Step 4: Work out your deduction
If the balance of the pool before calculating your deduction for the year is below the instant asset write-off limit, the pool is written off immediately (see Step 3: Asset sales and disposals).
If not, your deduction for simplified depreciation may include amounts for the following:
Existing assets
After calculating your opening pool balance in step one, work out your pool deduction using the following formula:
Opening pool balance × 30% (pool rate)
Newly acquired pooled assets (including second-hand assets)
Assets that have been acquired during the year and added to the small business pool are depreciated at 15%. This applies regardless of when during the year you acquired the asset.
Work out the deduction as:
Taxable purpose proportion × Adjustable value × 15%
Note: Assets that are immediately written-off don’t form part of your small business pool.
Example 8: calculating pool deductions
During the period from 1 December 2014 to 12 May 2015 when the instant asset write-off limit was $1,000 Fiona acquired the following assets:
- a photocopier/fax, acquired in December 2014, which she estimates was used 90% of the time in her business, so the value is calculated as $7,700 × 90% = $6,930
- a new refrigerated cabinet to replace the old one, acquired on 1 April 2015 at a cost of $9,000, to be used exclusively in the business, so the value is calculated as $9,000 × 100% = $9,000
- a delivery van, acquired on 1 May 2015 at a cost of $20,000, which she estimates will be used 70% of the time in her business, so the value is calculated as $20,000 × 70% = $14,000.
Table 3: Newly acquired assets
|
Asset
|
Adjustable value ($)
|
% used in the business
|
Amount added to pool ($)
|
|
Photocopier/fax
|
7,700
|
90
|
6,930
|
|
New refrigerated cabinet
|
9,000
|
100
|
9,000
|
|
Delivery van
|
20,000
|
70
|
14,000
|
|
Total of pooled assets added during the year
|
n/a
|
n/a
|
$29,930
|
If Fiona acquired and started to use the above assets in the 2016–17 or 2017–18 income years, or between 1 July 2018 and 28 January 2019 when the instant asset limit increased to $20,000, the business use portion of the:
- photocopier/fax and refrigerator are immediately written off
- van is moved to the small business pool.
If Fiona acquired and started to use the above assets from 29 January 2019, when the instant asset limit increased to $25,000 then all of the business use portion of assets could be immediately written off.
End of example
Cost addition amounts
If you made improvements to an asset allocated to your small business pool in an earlier income year, or you have costs associated with the disposal of an asset (see Step 3: Asset sales and disposals) you:
- apply the taxable purpose proportion of the existing asset to the improvement or disposal cost
- deduct the cost of improving the asset in the year the improvement is made, at the rate of 15%.
Step 5: Work out the closing pool balance
The closing pool balance takes into account any:
- pooled assets you installed or first used during the year
- pooled assets you disposed of during the year
- improvements you made, or cost addition amounts you incurred, in the current year to assets you held or installed ready to use in an earlier year
- deductions allowed for pooled assets.
Use the following worksheet to work out the closing pool balance at the end of each income year. The calculations will also need to consider the taxable purpose proportion of the assets.
Table 4: Closing pool balance worksheet
|
Worksheet item
|
Value ($)
|
Indicator
|
|
Opening pool balance for the year
|
$
|
A
|
|
Plus
Adjustable value of new assets that you first used, or installed ready to use, during the year (not including assets immediately written-off)
|
$
|
B
|
|
Plus
Any cost addition amounts including improvements you made to assets in the pool during the year
|
$
|
C
|
|
Less
Taxable purpose proportion of the termination value of any pooled assets you disposed of (including assets that were sold) during the year
|
$
|
D
|
|
Subtotal (A + B + C − D)
|
$
|
E
|
|
Less
Deduction allowed for assets you held at the start of the year
|
$
|
F
|
|
Less
Deduction allowed for new assets you first used during the year
|
$
|
G
|
|
Less
Deduction allowed for cost addition amounts including improvements you made to the pooled assets during the year
|
$
|
H
|
|
Closing pool balance for the year (E − F − G − H)
|
$
|
Nil
|
Example 9: calculating closing pool balance
Table 5: Fiona works out her closing pool balance for the year as follows:
|
Worksheet item
|
Value ($)
|
Indicator
|
|
Opening pool balance for the year
|
$30,200
|
A
|
|
Plus
Newly acquired pooled assets. This does not include assets immediately written-off
|
$29,930
|
B
|
|
Plus
Cost addition amounts
|
$350
|
C
|
|
Less
Disposals
|
$8,000
|
D
|
|
Subtotal (A + B + C − D)
|
$52,480
|
E
|
|
Less
Deduction for pooled assets opening balance
|
$9,060
|
F
|
|
Less
Deduction allowed for pooled assets you first used during the year
|
$4,490
|
G
|
|
Less
Deduction for cost addition amounts
|
$53
|
H
|
|
Closing pool balance for the year (E – F – G – H)
|
$38,877
|
Nil
|
End of example
Opening pool balance
The opening pool balance for an income year is the closing pool balance from the previous income year, except where you either:
- changed the extent you use a pooled asset in your business
- have assets that you started to use, or hold ready to use, since last choosing to use these rules.
Adjusting for these circumstances will ensure that your pool deduction is based on the correct estimate of the value of all your assets and the taxable use proportion.
