The small business instant asset write-off (IAWO) threshold has been temporarily increased, yet again, allowing eligible small businesses to fully and immediately deduct the cost of eligible depreciating assets.

While seemingly straightforward, with all the changes year in and year out, understanding the fine print and ensuring your business gets it right is important.

Legislative framework

The IAWO rules are available to entities that carry on a business and have an aggregated turnover of less than $10 million (small business entity or SBE). In working out an SBE’s aggregated turnover, its annual turnover must be grouped with that of any entities ‘connected with’ the entity and that are ‘affiliates’ of the entity.

An SBE can choose whether it applies the Simplified Depreciation Rules (SDR) or the general uniform capital allowances (UCA) regime. If it chooses to apply the SDR, it must adopt all the rules in Subdivision 328-D and cannot cherry-pick from the various rules. In particular, an SBE cannot choose to write off an asset costing less than $20,000 using the IAWO but use the UCA rules for assets costing $20,000 or more instead of the pooling rules in Subdivision 328-D.

Temporary increase in the standard threshold

The IAWO was introduced in 2021. The threshold in section 328-180 has always been, and still is, $1,000. Aside from a minor temporary modification in 2012, the threshold has been modified six times since 12 May 2015 and is proposed to be amended again for 2024–25.

2023–24 threshold

The IAWO threshold for eligible new or second-hand assets that were first used or installed ready for use from 1 July 2023 to 30 June 2024 has been temporarily increased to $20,000.

To be eligible for the temporarily increased IAWO, the asset must cost less than $20,000 (after claiming any GST credits to which the entity is entitled). The $20,000 threshold applies on a per-asset basis, so eligible SBEs can immediately deduct the cost of multiple identical or similar assets.

Further, an asset will be eligible for the $20,000 IAWO only if it is first used or installed ready for use for a taxable purpose during 2023–24. Entering into a contract, placing an order, receiving an invoice or making payment for the asset in part or in full is not enough if the asset is not delivered until after 30 June 2024.

As part of the Federal Budget 2024–25 the Government announced that the temporarily increased threshold of $20,000 for SBEs will be extended by 12 months to 30 June 2025.

What assets are excluded from the IAWO?

The following exclusions and limits apply to the IAWO:

• The car limit ($68,108 for 2023–24 and $69,674 for 2024–25) applies when working out the allowable depreciable amount for a car.
• Any GST credit to which the entity is entitled to claim is excluded from the cost of the asset, and if only a portion of the GST credit can be claimed, then the cost is reduced by the portion of the GST credit that can be claimed.
• Assets that cost $20,000 or more must be allocated to a pool and depreciated using the pooling rules.
• The TPP of the cost of an improvement to an asset that has been written off under the IAWO in a previous income year can also be written off under the IAWO if the cost of the improvement is less than the IAWO threshold. The cost of any subsequent improvements cannot be immediately deducted and must instead be placed into the pool.

The UCA rules must be used for the following assets:

• assets that are leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease;
• assets allocated to a low-value pool before using the SDR;
• horticultural plants, including grapevines;
• software allocated to a software development pool (but not other software);
• assets used in research and development (R&D) activities; and
• capital works, including buildings and structural improvements.

Some primary production assets can be depreciated using either the UCA rules or the SDR.

What are the tax implications when a fully expensed asset is disposed of or sold?

When a disposal or sale occurs, a balancing adjustment event happens to the depreciating asset. If an immediate deduction was claimed for an asset to which a balancing adjustment event later happens, the TPP of the asset’s termination value (usually the sale price less GST) must be included in the entity’s assessable income in the income year in which the balancing adjustment event happened.