The Government recently released exposure draft legislation proposing to make several tax law amendments in relation to depreciation rules for small business. The proposed amendments will apply to small businesses that have an annual turnover of less than $2 million for an income year from the 2012- 2013 income tax year.

Whilst these changes sound positive and will undoubtedly stimulate small business investment, the amendments for the instant asset write-off and the simplified depreciation pooling arrangements are subject to the passing of the Minerals Resource Rent Tax Bill (Mining Tax) – which is yet to be passed, and the Clean Energy Bill 2011 (Carbon Tax) – which is now law.

Instant write-off of an asset

Under the proposed amendments, the small business asset write-off threshold will be increased from $1,000 to $6,500. This means small business could use the capital allowance provisions to write off depreciating assets that cost less than $6,500 in the income year in which the asset is first used, or installed and ready for use. Small businesses may also be able to claim an immediate tax deduction for the addition to existing assets that cost less than $6,500, provided the addition also costs less than $6,500.

Depreciation pooling arrangements

Small businesses that acquire depreciating assets that cost $6,500 or more, will be allowed to allocate these assets into a general pool and depreciate at 15 percent in the year of allocation. In subsequent years, the depreciation rate is increased to 30 percent.

Motor vehicle deductions

The proposed amendments will refine tax law, allowing small businesses to claim an accelerated initial deduction for new and second-hand motor vehicles acquired from the 2012 – 2013 income year. Under the changes, a small business that uses the capital allowance provisions will be able to claim an immediate deduction of up to $5,000 for a motor vehicle in the year in which it is first used or available for use. The remainder of the purchase price would be allocated and depreciated as part of the general pool. The proposed amendments will implement the Government’s proposal announced in the 2011 – 2012 Budget.

Entrepreneurs’ tax offset

The amendments propose to abolish the entrepreneurs’ tax offset.