Changes to Depreciation Rules for Business

The last few years have seen high and unlimited depreciation write off limits for tax purposes. 

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In 2020 during the COVID-19 pandemic, the government raised the immediate asset write off threshold to $150,000 for small businesses using the simplified depreciation rules then brought in Temporary Full Expensing (TFE), allowing many eligible businesses to claim an immediate deduction for depreciable assets. This measure was extended to 30 June 2023. 

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After several years of such generous write offs, this is set to come to an end on 30 June 2023. 

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Immediate Asset Write Off Changes

From 1 July 2023, the immediate write-off threshold will return to $20,000 for small business entities with an aggregated turnover of up to $10 million, using simplified depreciation (general small business pool rules), and to general depreciation rules for other taxpayers. Businesses using the general small business pool will be able to claim an immediate deduction for assets costing $20,000 or less, with anything more than that being allocated to the pool where assets are collectively depreciated at 15% in the first year and 30% thereafter until the pool balance falls below the immediate write off threshold and is written off. 

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How do the changes in depreciation rules impact my business? 

Debating when to purchase equipment? If you’re having a profitable year in 2023 and expect less profitable years ahead, it may be beneficial to purchase the equipment, ensuring it is installed and ready for use by 30 June 2023 in order to take advantage of an immediate deduction. If your profits are relatively consistent year after year and you would prefer a more even spread of depreciation over several years, it may make more sense to purchase equipment and depreciate using effective life rates after 30 June 2023. 

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The taxable gain on sale of assets

It is important to remember that once an asset has been written off or fully depreciated, any proceeds received when sold are taxable. For example, if a business purchased a vehicle for $50,000 and claimed an immediate deduction in the 2021 financial year, if it is subsequently sold in a future year, say 2024, for $30,000, the business is required to pay tax on the $30,000 proceeds. The taxable gain on sale of assets is calculated as Proceeds – Written Down Value. As the asset was fully depreciated (written off), it would have a written down value of nil (the amount left to be depreciated). 

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From 1 July 2023, the tax implications are more likely to work the other way than in the last few years. In recent years, the profits on sale of existing equipment vs deduction for immediate write off of new equipment has tended to lower taxes. However, when selling existing assets that have been written off already, these proceeds are fully taxable, yet new assets won’t qualify for an immediate deduction anymore, so selling and replacing assets may actually increase tax payable. 

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For example

If a machine that had previously been written off (fully depreciated) were traded in at a value of $40,000 for a new machine costing $75,000 on 1 January 2024, the $40,000 is considered proceeds for the disposal of the old machine. The whole proceeds would be profit on sale of assets. 

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The new machine can be depreciated by either using the small business simplified depreciation rules (if eligible) where it would be depreciated at 15% in the first year and 30% thereafter as part of the general small business pool, or using the general depreciation rules at the rate specified by the ATO. 

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Let’s say the depreciation rate is 25% for that machine. In the first financial year, being 2024, the depreciation claim would be $75,000 x 25% x 6/12months = $9,375. The net impact on profit for the year would be an increase of $40,000 - $9,375 = $30,625. 

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If there was the same situation but in the 2023 financial year, the $40,000 would still be taxable proceeds, but the full $75,000 could be written off immediately, resulting in a decreasing net impact on profit of $40,000 - $75,000 = ($35,000). The business would then pay tax on $35,000 less profit compared with $30,625 more profit if the same machine were replaced in the following year.   

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Planning is key – it’s important that if you wish to claim temporary full expensing for capital purchases for the 2023 financial year that you ensure you meet the necessary conditions by 30 June 2023 including ensuring that the delivery and installation of assets occurs prior to the deadline. A deposit or full payment does not satisfy the requirement of being installed and ready for use. If you have any questions please contact us. 

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