Following the announcement of the Australian Government’s extension to the 2023/2024 $20,000 instant asset write-off, and as we approach the end of financial year, we thought it would be worth diving into the intricacies of accelerated depreciation and what the extension could mean for you.
In this guide, we’ll explore what accelerated depreciation is, how it works, and the basic points of the instant asset write-off extension.
What is accelerated depreciation
Accelerated depreciation refers to the depreciation of an asset. This means the decreasing value or expense of an asset.
Simply put, when an asset is new and at its most efficient - a company will use it the most. Due to this, the asset will depreciate the most in value during its first few years. This is accelerated depreciation.
A popular strategy used by the government to stimulate spending is the accelerated depreciation of assets. This is also known as the instant-write off which we will discuss later in this guide.
How does accelerated depreciation work
With straight-line depreciation, an asset’s value will generally follow a steady trajectory over time. However, with accelerated depreciation, the asset will depreciate in cost and value the most during the early years of its lifespan, with a slower depreciation rate later on. The main difference between the two types of depreciation is timing.
Types of accelerated depreciation
The key types of accelerated depreciation are the double-declining balance (DDB) method, and sum of the years’ digits (SYD) method. Both methods are used to somewhat accurately reflect an asset’s diminishing value over time.
With the DDB method, certain assets will be depreciated at twice the straight-line rate. This results in depreciation being the highest in the first year of ownership and declining over time. DDB provides a more aggressive depreciation method than SYD which has a somewhat smoother decline.
With SYD depreciation, the total useful life of the asset is also taken into account. SYD results in higher depreciation expenses in the early years of an asset's life, gradually decreasing over time. The choice between DDB and SYD will generally depend on the nature of the asset, its expected pattern of use, and regulatory or financial reporting requirements.
Benefits and drawbacks of accelerated depreciation
The benefits of accelerated depreciation are that you can decrease your taxable income and increase your net cash flow. This is especially helpful for new businesses who may be having short-term cash-flow problems. Additionally, the money saved on taxes can be reinvested in the business to continue its growth.
The drawback of accelerated depreciation is that it decreases the value of an asset faster than its actual use or wear and tear would require you to. Accelerated depreciation is also restricted to certain assets which can limit the usefulness of the method for some businesses.
Additionally, accelerated depreciation can affect the resale value of assets, and have tax implications in the long term. Since accelerated depreciation results in a higher deduction in the earlier years of an asset’s useful life, the value of the asset may make it harder for businesses to sell it at a fair price in later years. And while accelerated depreciation can help businesses reduce their taxable income in the short term, if they sell a depreciated asset - they may have to pay higher taxes on the sale.
Tax Benefits of Accelerated Depreciation
In the short term, accelerated depreciation can have some income tax benefits. With this method, businesses can deduct higher expenses for eligible depreciating assets in their tax return for varying percentages during the first few years of the asset’s lifespan. However, as the asset is used less in later years, the expenses that can be deducted will be lowered.
Aus Government extension of the $20,000 instant asset write-off
In May 2024, the Australian Government announced it would extend the $20,000 instant asset write-off by a further 12 months until June 2025. The measure was previously announced as part of the 2023-2024 budget in relation to the 2023-24 income year.
The announcement outlined that small businesses with aggregated turnover of less than $10 million will be able to immediately deduct the full cost of eligible assets costing less than $20,000. The assets must be first used or installed ready for use by 30 June 2025. The $20,000 threshold applies on a per asset basis so small businesses can instantly write off multiple assets.
Small businesses can continue to place assets valued at $20,000 or more into a small business simplified depreciation pool, meaning that these assets can be depreciated at 15 per cent in the first income year and 30 per cent each income year after that.
For more information, visit instant asset write-off for eligible businesses.
How to calculate accelerated depreciation
SYD Accelerated Depreciation Method: Depreciable Cost X (remaining useful life ➗ SYD)
To calculate the SYD = (useful life X (useful life +1)) ➗ 2
DDB Accelerated Depreciation Method: 2 X (straight-line depreciation rate X start of year value)
To calculate straight-line depreciation rate = (purchase price - salvage value) ➗ useful life
Final Thoughts
Accelerated depreciation is a key tool in a business’ financial strategy - especially in light of government incentives such as the Australian Government’s extension of the $20,000 instant asset write-off.
As explored in this guide, the two main accelerated depreciation methods like the double-declining balance (DDB) and sum of the years’ digits (SYD) facilitate a faster reduction in asset value. Due to this - short-term tax benefits are enjoyed, as well as bolstered cash flow. While accelerated depreciation offers immediate tax relief and enhances liquidity, businesses must balance its benefits against its long-term implications.
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