Permanent instant asset write-offs and tax accounting

The Federal Government announced in its May 2026 Budget that it will permanently increase the instant asset write-off limit for small businesses from $1,000 to $20,000 to help improve cash flow and reduce compliance costs. Previously, increases in the instant asset write-off limit were time-limited, such as during the COVID-19 years. This article demonstrates the deferred tax implications that result.

Which entities can apply the instant asset write-off?

Only small businesses with aggregated turnover of less than $10 million that have chosen to calculate depreciation deductions under the simplified depreciation rules in Subdivision 328-175 of the Income Tax Assessment Act 1997 (ITAA 1997) can apply the new instant asset write-off rules.

When do the new rules apply?

The measure applies from 1 July 2026.

Which assets are eligible?

The instant asset write-off applies to the business portion of a depreciating asset costing less than $20,000 that is first used or installed ready for use in an income year.

The instant asset write-off can be used for:

  • Multiple assets, if the cost of each individual asset is less than the $20,000 limit, and
  • New and second-hand assets.

The ATO website contains more information about the detailed requirements of this measure.

What about assets costing more than $20,000?

The ITAA 1997 contains the requirements for depreciating assets for small businesses.

For assets exceeding the instant asset write-off threshold of $20,000, small businesses that have chosen to apply Subdivision 328-D must depreciate them by applying the simplified depreciation regime in Subdivision 328-D. Under these simplified rules, assets costing $20,000 or more are depreciated on a diminishing value basis using the small business depreciation pool, which is treated as a single depreciating asset with a depreciation rate of 30%.

If the small business wants to use the Division 40 depreciation rates instead of the small business depreciation pool method:

  • They must not choose to enter the simplified depreciation regime in Subdivision 328-D, and
  • They would then not be entitled to use the $20,000 instant asset write-off for that year.

Each year, small businesses can choose whether to use the small business simplified depreciation regime for that year. 

Example

ABC Limited purchased an asset for $10,000 on 1 October 2026 and it was first used on 1 October 2026.

Assume ABC Limited applies Division 40 and not the simplified depreciation regime.

The asset usually generates a Division 40 tax depreciation deduction of 20% straight-line per annum, and ABC Limited uses the same 20% straight-line method to determine accounting depreciation.

Tax rate is 25%, and the year-end is 30 June.

No instant asset write-off

If ABC Limited decides not to take advantage of the instant asset write-off allowance, it uses the same rates for accounting and tax depreciation (20% straight-line). There would be no temporary differences, and therefore no deferred tax asset or liability balances relating to such assets. If there were a difference between the tax and accounting depreciation rates, then there would be a deferred tax consequence.

As at 30 June 2027, the tax base and carrying amount of the asset are $8,500 (i.e. $10,000 less 20% of $10,000 X 9 months).

Instant asset write-off

Entities that take advantage of this instant asset write-off measure will need to ensure that their fixed asset registers for taxation purposes are adjusted to include the 100% instant write-off for assets meeting these criteria, and for other assets, the 30% depreciation rate in the small business depreciation pool. They will also have to recognise a deferred tax liability for the assessable temporary difference that arises between the asset’s tax base and its carrying amount for accounting.

Accounting depreciation – 1 October 2026 to 30 June 2027                            $1,500

($10,000 X 20% X 9/12 months)

Tax depreciation – 1 October 2026 to 30 June 2027                                       $10,000

100% instant asset write-off

The table below shows how ABC Limited will have to recognise a deferred tax liability of $2,125 for the assessable temporary difference between the asset’s accounting carrying amount of $8,500, and its tax base of NIL.

 

Accounting

Tax

Difference

Deferred tax liability @ 25%

 

$

$

$

$

Cost – 1 October 2026

10,000

10,000

-

-

Depreciation – 1 October 2026 to 30 June 2027

(1,500)

(10,000)

8,500

2,125

Carrying amount – 30 June 2027

8,500

-

8,500

2,125

On 30 June 2027, the following journal entry is processed to recognise the deferred tax liability:

Dr         Deferred tax expense (P/L)                   $2,125
Cr         Deferred tax liability                                          $2,125

Need help?

Please contact a member of BDO’s IFRS & Corporate Reporting team regarding the tax effects of instant asset write-offs, or your local BDO Tax or Business Services teams for tax assistance on this topic.