Instant asset write-off for sole traders: how it works and what to check

What it is

Normally an asset that lasts more than a year is depreciated: you claim a slice of its cost each year over its effective life. The instant asset write-off lets an eligible small business claim the whole cost in the year the asset is first used or installed ready for use, provided the cost is below a threshold.

The threshold has been $20,000 per asset for small businesses (aggregated turnover under $10 million) in recent years, but it is set year by year and has been extended in successive budgets rather than made permanent. Confirm the threshold for the current income year on the ATO site before you buy something on the strength of it.

Who qualifies

You need to be carrying on a business (a hobby does not count) with aggregated turnover under the small business limit, and you need to use the simplified depreciation rules. Most sole traders do both. The asset must be used, or installed ready for use, for a taxable purpose in the year you claim it.

Per asset, and business-use only

The threshold applies to each asset separately, so three $8,000 purchases are each written off even though they total $24,000. It is the cost of the asset that is tested against the threshold, not the business portion.

You deduct the business-use percentage. A $3,000 laptop used 70% for business is a $2,100 deduction. If you are registered for GST and claim the GST credit, the cost for the threshold test and the deduction is the ex-GST amount; if not, it is the GST-inclusive amount.

Timing

The deduction goes in the year the asset is first used or installed ready for use, not the year you ordered or paid for it. A camera ordered on 25 June that arrives on 3 July is a next-year deduction. If a purchase matters for this year’s tax, make sure it is in your hands and working by 30 June.

Cars

A car can be written off if it costs less than the threshold, at the business-use percentage. Cars over the threshold are depreciated normally and are also subject to the car limit for depreciation. See motor vehicle deductions.

Above the threshold: the small business pool

Assets that cost more than the threshold go into the small business pool, where they are depreciated at 15% in the first year and 30% each year after, regardless of the asset type. If the pool balance drops below the threshold at the end of a year, the whole pool can be written off. It is simpler than tracking each asset’s effective life, which is the point.

It is a deduction, not free money

A $10,000 write-off reduces your taxable income by $10,000. At a 30% marginal rate that saves $3,000 in tax; you still spent $10,000. Buying something you do not need to get a deduction never adds up. Buying something you were going to buy anyway, before 30 June rather than after, can bring the tax benefit forward a year.

Records

Keep the tax invoice, a note of the date the asset was first used, and the basis for the business-use percentage. If you later sell the asset or stop using it for business, there is an adjustment to make, so keep the records for five years after that as well. FlowFi flags equipment purchases in your bank statement so you and your accountant can decide how to treat each one.