The small business pool: how simplified depreciation works above the instant write-off threshold

Who can use simplified depreciation

Simplified depreciation is available to a small business entity that has chosen the simplified rules. In practice that means a business whose aggregated turnover is under the ATO’s small business threshold, which is set by law and can change. Nearly every sole trader qualifies. Once you choose the regime, you need to apply it to all your eligible depreciating assets, and if you opt out there are rules about when you can come back in.

If you are unsure whether you are a small business entity for the year, the ATO has a short online check. See also the instant asset write-off for sole traders.

Two buckets: immediate deduction and the pool

Each asset you buy for the business falls into one of two buckets.

• Assets that cost less than the instant asset write-off threshold are deducted in full in the income year the asset is first used or installed ready for use.
• Assets that cost the threshold or more go into the general small business pool, and are deducted over several years.

The cost is generally worked out after GST credits. If you are registered for GST and claim the credit, the asset’s cost for this test excludes the GST. If you are not registered, the GST you paid is part of the cost.

How the pool deduction is calculated

For assets added to the pool, the deduction in the first year is generally 15% of the cost, regardless of how late in the year you bought the asset. In later years, the deduction is generally 30% of the opening pool balance. Each year you add new pooled assets, deduct 15% on those additions and 30% on the balance brought forward.

A worked example, using round numbers for illustration only. You add a $30,000 vehicle in year one. The first-year deduction is $4,500 and the closing balance is $25,500. In year two you deduct 30% of $25,500, which is $7,650, leaving $17,850. The balance keeps shrinking, but never quite reaches zero, unless the pool is written off.

When the pool is written off

If the pool balance at the end of the year, before that year’s deduction, is below the instant asset write-off threshold, you can deduct the whole balance. This is how most pools eventually disappear. It is also why the threshold matters twice: it decides which assets enter the pool, and when a small remaining balance can be cleared.

Because the threshold has been changed temporarily more than once, the pool rules sometimes have special treatment for those years. The ATO publishes the current rules under the simplified depreciation pages, so read them before you plan a purchase.

What happens when you sell a pooled asset

You do not track each asset separately. When you sell or dispose of a pooled asset, you reduce the pool by the sale price (the taxable purchase price, which excludes GST). You do not calculate a gain or loss on that single asset. If the sale price is larger than the pool balance, the excess becomes assessable income.

The GST on the sale still has to be reported on your BAS if you are registered, since you are selling a business asset. See GST on invoices.

What cannot go in the pool

Some assets are excluded, including those leased out to others under certain arrangements, assets you are depreciating under another method by choice, and trading stock. Cars are subject to the car limit, which caps the cost used for depreciation. Check the limit for the year on the ATO website. A private-use asset only gets the business share of the deduction, so a ute used 70% for work is deducted at 70%. See private use and business percentage and buying a car for your business.

Records to keep

Keep the tax invoice for every pooled asset, the date it was first used, any private-use percentage with the reasoning, and a pool schedule showing the opening balance, additions, disposals and deductions each year. Keep records for at least five years after the pool closes, because a pool can run for many years. See record keeping requirements.

How FlowFi helps

FlowFi flags large equipment purchases on your statement and separates them from everyday expenses, so you can see which ones sit above the threshold. It does not run your depreciation schedule, so keep a pool schedule yourself or ask your accountant to maintain it.