In this year’s Budget announcement, much of the publicity for small businesses was built around the extension of the $20,000 instant asset write-off.

However, this is a minor change in comparison to what has now become available to businesses with a turnover of up to $10 million under the simplified depreciation rules. 

Key features of the new framework 

Under this new ruling, company owners can actively elect to place assets that cost $20,000 or more (which can’t be immediately deducted under other provisions) into the general small business pool to be deducted over time. Under this pooling mechanism, businesses can claim depreciation rates of 15 per cent in the first year and 30 per cent in each subsequent year (on a diminishing value basis). 

This was previously a benefit only offered to companies with a turnover of less than $2 million, but has now been opened to much larger organisations. Owners of businesses in such capital-intensive industries such as mining services should take heed of this depreciation bonanza for the year ahead. 

What this means for company owners 

It is not uncommon for companies in capital-intensive industries to have assets employed in their businesses which are almost equal in value to their annual turnover as income from those assets are in essence ‘hire fees’. Understanding this, with such a high capital base, any increase in non-cash tax deductions such as depreciation has a very significant effect on taxable profit and as a function of this annual company tax bills. 

Tax paid on trading profits needs to be seen in light of its true effect on cash flow, as not only is tax payable some nine months after the end of the trading year, it is the extra amounts paid in the subsequent three to four BAS statements where an estimate of next year’s likely tax is payable based as a percentage of turnover which has been determined by the taxable profit on the prior trading. 

For any profitable company this is a drain on cash; however, for an expanding business, this can be particularly arduous as expanding businesses, by nature of their growth, are invariably cash hungry as the gap between expended and receipted cash expands through those growth periods. 

When a profitable company can increase the level of depreciation through the new depreciation rules by $1 million, the reduction in its tax bill is $600,000, being $300,000 in the initial tax payable and a further four lots of $75,000 ($300,000) over the subsequent BAS payments. 

To maximise this cash flow benefit, it makes sense to make purchases close to the end of the financial year. However, business owners need to be educated on these changes and how they can take advantage of them, sooner rather than later so they can prepare for the year ahead. 

How to act on these changes 

Simply contact your accountant and discuss migrating into the general small business pool. Your accountant will do the rest. You can use simplified depreciation rules if your business has a turnover (the total normal sales of your business) of less than: 

• $10 million from July 1, 2016 onwards. • $2 million for previous income years. 

Using simplified depreciation rules means you: 

• Immediately write-off the business use of most assets that cost less than $20,000 each, whether new or second- hand, as long as those assets are bought and installed ready for use between 7.30pm (AEST) on May 12, 2015 and June 30, 2018. 

• Pool most other depreciating assets that cost $20,000 each or more and claim 15 per cent deduction for depreciation of that pool in the first year, and 30 per cent each year after the first. 

For a complete overview on these changes, companies with an annual income of less than $10 million should visit the ATO website at www.ato.gov.au.