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What is accelerated depreciation?

As businesses prepare for the end of financial year (EOFY) 2021, it’s a good time to look at factors that may affect your tax return and consequently your cash flow – one of these measures may be accelerated depreciation. Here, we look at what accelerated depreciation means, how it works and what benefits it could have for your business.

Before we explore accelerated depreciation, it's important to note that it relates only to assets acquired between 12 March and 6 October, 2020. For assets acquired after this time, refer to Temporary Full Expensing.

What is accelerated depreciation?

In March 2020, accelerated depreciation measures were introduced to provide an incentive to businesses with aggregated turnover of less than $500 million for the 2019-20 and 2020-21 income years. These initiatives are known as Backing Business Investment - Accelerated Depreciation.

The scheme allows businesses to deduct the cost of depreciating assets at an accelerated rate via their tax return for the tax year the asset is first installed / used. Usual depreciation arrangements apply to subsequent income tax years so long as the asset is still held.

If a business is eligible for Accelerated Depreciation allowances, they have the choice of adopting the method on an asset-by-asset basis, however, once selected the method cannot be changed.

To be eligible for the accelerated deduction, the depreciating asset must be:

new
purchased or installed after 12 March 2020
not be an asset to which temporary full expensing or instant asset write-off rules have been applied.

In previous years, businesses could only claim spending on capital assets over time. However, the accelerated depreciation measures mean that certain businesses are eligible for an instant asset write-off plus an increased percentage deduction.

HOW DOES ACCELERATED DEPRECIATION WORK?

Accelerated depreciation means you can deduct costs for eligible depreciating assets in your tax return at varying percentages. For businesses with turnover up to $500m in turnover (medium businesses), you can deduct 50% of the cost of your asset in the income year it has been first used or installed ready for use. You can then use existing depreciation measures for the same asset for the remainder of the value. However, the depreciated value must be decreased by the 50% instant deduction already claimed.

For example, if your business has an annual turnover of $200 million for the year 2020-2021 income year and you install a $1 million truck-mounted concrete pump for the business, you can claim 50% ($500,000) of the concrete pump’s value under the new accelerated depreciation. In addition, you’ll be able to claim 30% (standard depreciation rate = $150,000) of the remaining $500,000 under existing depreciation rules in that year.

ACCELERATED DEPRECIATION FOR SMALL BUSINESSES

For a small business with a turnover of less than $10 million in the 2019-2020 or 2020-2021 years, the simplified depreciation rules mean that assets over the instant asset threshold are added to the general business pool, providing a deduction of 57.5%, rather than 15%, of a new depreciating asset in the year it’s added to the pool. In the years following, the asset will fall under the general small business pool rules.

To apply this, a small business can add to its general small business pool assets newly purchased items that:

cost $150,000 or more (as instant asset write-off applies to assets costing less than this)
are eligible for Backing Business Investment – Accelerated Depreciation
are not eligible for temporary full expensing.