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Four Things Independent Contractors Need to Know About Simplified Depreciation

If you are a freelancer or an independent contractor, the Australian Taxation Office considers you a small business for tax purposes. This means when you declare your income to the ATO, you can also write off the expenses you incur in order to earn that income. While most small expenses can be deducted the year they are incurred, the ATO applies a depreciation schedule to large purchases.

Depreciation schedules can be confusing, but luckily, to make it easier the ATO offers simplified depreciation for small businesses. Here's what you need to know:

1. You can write off assets that cost less than $20,000 in the year of purchase.

Under the simplified depreciation schedule, any assets you purchase for less than $20,000 can be written off in the year of purchase. To illustrate, if you buy a $1,000 computer for your freelance writing business, a $3,000 commercial oven for your catering company or a similar purchase for less than $20,000, you can claim that amount as a business expense on your tax return with worrying about depreciation.

2. You must check the threshold for previous tax years.

However, it's important to note that the $20,000 threshold is relatively new. If you are filing taxes for a previous year, check the threshold for that year. For example, from January 1, 2014 to May 5, 2015, the threshold was only $1,000.  

3. You must pool and depreciate assets costing more than $20,000.

If you purchase a backhoe loader for your landscaping company for $50,000 or spend $30,000 on a metal shed for your auto service work, you cannot write off those purchases individually as they are beyond the current threshold. Instead you must pool them all together, and at the end of the year when you are filling out your tax return, you need to add the cost of those assets together. Then you may claim 15 percent of the total during that tax year. That following year you can claim 30 percent, and you can claim that percentage every year until you have written off the total amount.

4. You cannot write off the portion of your assets used for personal use.

Imagine you are a clown who drives to birthday parties and special events all over the place. You buy a new vehicle, but you only plan to use it half the time for your clown business and the other half of the time for personal use. The car costs $24,000, and as a result, you can claim half of it ($12,000) as a business expense. Unfortunately, however, you cannot write off the full $12,000 in the year of purchase. Because the total cost of the item is more than the $20,000 threshold, the ATO requires you to pool and depreciate this asset over time.

Even simplified depreciation schedules can be hard to understand. If you want to learn more, contact an accountant at a business like Capital Claims Tax Depreciation.