Understanding Small Business Depreciation Rules

The Basics of Small Business Depreciation

Depreciation is the method of allocating the cost of an asset over its useful life. From an accounting perspective, this means recognising the outlay of significant asset purchases like machinery, vehicles or office equipment over several years, rather than taking a large hit to business profits in a single year.

In Australia, the Australian Taxation Office (ATO) sets out specific depreciation rules that small businesses can elect to use as a method of accelerating the tax deductibility of certain small business assets. These rules detail how and when you can claim depreciation on your business assets. Two key methods we discuss with clients are the Instant Asset Write Off rules and the Small Business Pooling rules.

What is Instant Asset Write-Off?

The hot topic for small business (and politicians) is the Instant Asset Write Off rules. The instant asset write-off scheme allows small businesses to immediately deduct the cost of eligible assets, under a specified cost threshold, for tax purposes in a single financial year. 

Unfortunately, gone are the days of Temporary Full Expensing: the temporary COVID-19 measure whereby eligible small businesses could write off the entire cost of their eligible asset in full without a cap on the purchase price of the asset.

Currently, there is uncertainty around the future thresholds and eligibility criteria for instant asset write-offs. As it stands, the government have not yet legislated the anticipated extension of the $20,000 instant asset write-off threshold for the 2025 financial year. In fact, these same rules relating to the 2024 financial year weren't officially law until 28th June 2024, realistically much too late for most small businesses to enact for the 2024 financial year unless your intended purchase was in stock and delivered the following day. 

We highly recommend you keep in touch with your tax professional if this is a highly impactful decision for your business. At BLG, we understand that this is a critically beneficial measure for small businesses when adequately and appropriately planned, so we're keeping a close eye on this space. 

Advantages of Understanding Depreciation Rules

Knowing the in's and out's of small business depreciation can assist with business planning strategies by aligning the timing of purchases and related tax obligations with your businesses cashflow and it's need for the asset.

With the uncertainty of the Instant Asset Write Off measures, its best to also have an understanding of the Small Business Pooling rules. While not a generous as the $20,000 instant tax deduction, the pooling rules allow small businesses to choose a more accelerated depreciation method than the general useful life method. As is with the instant asset rules, there are eligibility criteria businesses must meet to qualify for the pooling rules. 

By maximising deductions, you can reduce your taxable income thereby lowering your tax liability. This can free up cash that can be reinvested into other areas of your business for further growth and development.

We find clients are really engaged with understanding these rules at tax planning: a key time of the year we help our clients assess their business position before the financial year is finished - you can read more about tax planning here.

Common Mistakes and How to Avoid Them

One common mistake small businesses make is not keeping accurate records of asset purchases and depreciation claims. This can lead to discrepancies in your financial statements and issues during tax audits. Make sure to file tax invoices, maintain detailed records and update them regularly.

Two other mistakes we often see is misunderstanding the specific timing of when assets need to be purchased and misunderstanding the small business eligibility criteria in order to qualify for the accelerated depreciation methods.

Ensure you are fully aware of the current rules and thresholds to avoid claiming ineligible assets. Consulting with a tax advisor can help you navigate these complexities and avoid costly mistakes. Our team at BLG Business Advisers have the expertise to help you out, so please talk with us if you would like clarity and support with your business situation.