Small business depreciation changes

Written on the 16 November 2011 by Thomson Reuters

The Government had released for comment exposure draft legislation which proposes to make various tax law amendments concerning the small business depreciation rules. The amendments are proposed to apply to small business entities as defined in s 328-110 of the ITAA 1997 that have an aggregated turnover of less than $2m for an income year. Public consultation closed on 28 September 2011.
The amendments are proposed to have effect from the 2012–2013 income year. However, it should be noted that the amendments for the instant asset write-off and the simplified depreciation pooling arrangements are subject to the enactment of the Minerals Resource Rent Tax Bills (yet to be introduced into Parliament) and s 3 of the Clean Energy Bill 2011 (introduced into the House of Representatives on 13 September 2011).

Instant write-off of an asset

Under the proposed amendments to the ITAA 1997, the small business instant asset write-off threshold will be increased from $1,000 to $6,500. The proposed amendments will implement one of the Government's responses to the Henry Tax Review in May 2010. The Government had proposed an instant asset write-off threshold of $5,000. This figure was later increased to $6,500 when the Government announced its "Clean Energy Future Plan" in July 2011.
Broadly, the amendments will allow small businesses that choose to use the capital allowance provisions in Subdiv 328-D to write off depreciating assets costing less than $6,500 in the income year in which they start to use the asset, or have it installed ready for use, for a taxable purpose during or before that income year. Other important points:
The existing capital allowance rules about the taxable purpose proportion of the depreciating asset would still apply, and would affect the value of the deduction that can be claimed.
Small businesses that choose to use the capital allowance provisions in Subdiv 328-D may also deduct the taxable purpose proportion of cost additions of less than $6,500 for assets costing less than $6,500.
Existing rules for the disposal of assets that have been totally written-off would continue to apply.

Simplified depreciation pooling arrangements

The proposed amendments will consolidate the long life small business pool and the general small business pool into a single pool to be written off at one rate. The changes will implement one of the Government's responses to the Henry Tax Review.
Generally, the proposed changes will allow small businesses that choose to use the capital allowance provisions in Subdiv 328-D to allocate depreciating assets costing $6,500 or more to the general small business pool and depreciate at a rate of 15% in the year of allocation and 30% for other years. Currently, small businesses can allocate depreciating assets costing $1,000 or more to either the long life small business pool or the general small business pool, depending on the effective life of the asset. The depreciation rates of these pools are 5% and 30%, respectively.
To simplify and streamline depreciation arrangements for small business, it is proposed that the long life small business pool will cease to exist after the 2011–2012 income year. The closing balance of a small business' long life pool and general small business pool for the 2011–2012 income year will then be added together to calculate the opening balance of the general small business pool for the 2012–2013 income year.
The total balance of the pool can be written off when it falls below $6,500. However, if the pool balance becomes less than nil, the amount by which the balance is less than zero is to be added to the taxpayer's assessable income for that income year.

Deductions for motor vehicles

The proposed amendments propose to amend the ITAA 1997 to allow small business entities to claim an accelerated initial deduction for motor vehicles acquired from the 2012–2013 income year. The proposed amendments will implement the Government's proposal announced in the 2011–2012 Budget.
Under the proposed changes, from the 2012–2013 income year, small business entities that choose to use the capital allowance provisions in Subdiv 328-D will be able to write-off up to $5,000 for a motor vehicle costing at least $6,500 in the year they start to use the motor vehicle for a taxable purpose. Taking into account the amount already written-off, the remainder of the purchase cost would be depreciated as part of the general small business pool, at 15% in the first year and 30% in later years. It should also be noted that, once in the pool, the deduction available in the start year would depend on the amount of the taxable purpose proportion of the adjusted value of the motor vehicle.
The proposed rules apply to any motor powered road vehicle, but do not apply to road vehicles if the main function of the road vehicle is not related to public road use or if the vehicle's ability to travel on a public road is secondary to its main function. Examples of motor vehicles that can be written-off include cars, trucks, vans, utilities, motorbikes and scooters. However, road rollers, graders, tractors, combine harvesters, earthmoving vehicles, and trailers, cannot be written off.

Entrepreneurs' tax offset

The proposed amendments propose to abolish the entrepreneurs' tax offset by repealing Subdiv 61-J of the ITAA 1997. This would implement the Government's proposal announced in the 2011–2012 Budget.