The temporary $20,000 immediate write-off for “small business entities” attracts regular queries, despite it being many months since the initiative was announced in the Federal Budget in May.
While most people understand the premise of the immediate write-off measures for assets costing less than $20,000 each (which can be written off immediately in the year that the asset is used or installed ready to use) there has been confusion about the rules related to claiming general small business pool balances that are less than $20,000 at year end.
The measure is particularly relevant for those small businesses (aggregated turnover of less than $2 million) that:
- have made a choice to apply the simplified depreciation rules during the 2014-15 income year, or
- have previously made that choice and had an opening pool balance as at July 1, 2014.
How does the general small business pool work?
A depreciating asset is an asset that is expected to decline in value. Businesses can claim the costs of most depreciating assets, however there are a few exclusions to the simplified depreciation rules.
From the 2015 budget night, depreciating assets that cost $20,000 or more each need to be allocated to a small business entity‘s general small business pool and deducted at a rate of 15% in the year they are allocated, and 30% in subsequent income years.
A deduction for the entire pool balance may be claimed if it is less than $20,000 at the end of the income years until June 30, 2017.
Tips to claim the small business pool deduction
When claiming a deduction for the entire low value pool balance, the following should be noted:1
You need to determine the pool balance correctly. The entire pool balance can be written-off if the balance at year end is less than $20,000. However, the pool balance is not the “closing pool balance”; instead a special calculation applies in working this sum out. In very simple terms, the balance is:
- the opening pool balance
- plus the cost of any additions to the pool (adjusted for any private use)
- plus the cost of any modifications, and update to or moving of, existing assets in the pool (adjusted for any private use)
- less the consideration received from the disposal of any pool assets.
If this calculation results in a balance less than $20,000 at the end of the relevant income year, that balance can be written off, thereby reducing the closing balance of the pool for that income year to zero.
This calculation can be complex, so please contact us for some assistance.2
It is not necessary to calculate the pool deduction in the usual way if the small business entity is eligible to write-off the balance. This takes precedence.3
The balance of the pool is determined prior to calculating any deductions in respect of the pool. That is, the calculation of the low value pool balance does not take into account any “depreciation” deductions being claimed at 15% for additions or 30% for existing assets in the pool.4
If there are no acquisitions or disposals of pool assets during the income year, it follows that the opening pool balance must be less than the low value pool threshold (that is, $20,000) in order for the entity to claim a deduction.
Consider the example below that was provided by the government when the initiative was announced.
Levi‘s Pet Washing is a small business entity and satisfied the conditions to make the choice to apply the small business capital allowance provisions in the 2013-14 and 2014-15 income years.
In the 2013-14 income year, Levi‘s Pet Washing bought a fitted-out van for $20,000 (100% for a taxable purpose). The business did not have any other assets in its general small business pool.
In its 2013-14 income tax return, as the cost of the van was over the $1,000 threshold that applied for the income year, the business claimed a deduction for 15% of the cost ($3,000), with the remaining cost ($17,000) being deductible in later income years under the pooling rules.
There were no further purchases during the subsequent income year, and the balance of the pool at the end of the 2014-15 income year remained at $17,000.
In its 2014-15 income tax return, Levi‘s Pet Washing claimed a deduction of $17,000 for the balance of the general small business pool, as the balance of the pool at the end of the year is below the $20,000 threshold that applied for that year.
These amendments to the simplified depreciation rules are part of a suite of small business measures. These include the 1.5% tax cut for incorporated businesses; 5% small business tax offset for individuals of unincorporated entities; immediate deduction for certain business start-up costs; and FBT exemption for the provision of multiple portable electronic devices to employees. We have written about various measures here:
- More of the Federal Budget’s small business concessions now have certainty
- Tax concessions for small business
- FAQs – the $20,000 immediate tax write-off
- Federal Budget 2015: Small Business