Depreciation is the decline in value of an asset over time. For sole traders, it's a non-cash deduction that can significantly lower your taxable income. However, the rules can be complex.
Simplified Depreciation for Small Business
If you are a small business with an aggregated turnover of less than $10 million, you can access simplified depreciation rules.
1. Instant Asset Write-Off
This allows you to claim an immediate deduction for the full cost of an asset in the year you buy it, provided it costs less than the relevant threshold (check the ATO website for the current threshold, as it changes frequently). This applies to both new and second-hand assets.
2. Small Business Pool
Assets that cost more than the instant asset write-off threshold are placed into a general small business pool.
- First Year: You deduct 15% of the asset's value.
- Subsequent Years: You deduct 30% of the opening pool balance each year.
Prime Cost vs Diminishing Value
If you aren't using the simplified rules, you have two choices for depreciating assets:
- Prime Cost Method: Claims a consistent amount each year (e.g., 20% of the cost for 5 years). Good if you want steady deductions.
- Diminishing Value Method: Claims higher deductions in the early years of the asset's life. Good if you want to maximise cash flow now.
Which is best? It depends on your current income. If you've had a high income year, accelerating deductions (Diminishing Value) might push you into a lower tax bracket. If your income is lower this year but expected to rise, Prime Cost might be better.