The Instant Asset Write-Off

The $20,000 instant asset write-off (IAWO) is set to become a permanent feature of the Australian tax system, giving eligible small businesses greater certainty when planning purchases of equipment and other business assets.

This guide is for small business owners seeking to understand how the instant asset write-off can impact their tax planning and cash flow.

The Australian Government announced in the 2026–27 Federal Budget that the $20,000 IAWO would be made permanent from 1 July 2026.

For the 2025–26 income year, eligible small businesses can already use the IAWO for qualifying assets costing less than $20,000 that are first used or installed ready for use by 30 June 2026.

The permanent extension means eligible businesses are expected to continue having access to the same threshold after this date, subject to the relevant legislation being passed.

What is the instant asset write-off?

The IAWO allows eligible small businesses to immediately deduct the business portion of the cost of an eligible depreciating asset.

For the 2025–26 income year, the asset must cost less than $20,000.

Without the IAWO, a business would generally need to claim the cost of the asset gradually through depreciation over several income years.

By bringing the deduction forward, the instant asset write-off can reduce the business’s taxable income for the year in which the equipment is first used or installed ready for use.

For example, an eligible company purchases equipment for $18,000 and uses it entirely for business purposes. Before claiming the IAWO, the company has taxable income of $100,000.

The $18,000 deduction would reduce its taxable income to $82,000.

If the company is eligible for the 25% company tax rate, the figures would look like this:

• Tax on $100,000 before the deduction: $25,000
• Tax on $82,000 after the deduction: $20,500
• Indicative tax saving: $4,500

The business has still spent $18,000 on the equipment. The IAWO does not provide an $18,000 refund. In this example, it reduces the company’s tax by $4,500.

The actual benefit will depend on the business’s structure, tax rate, taxable income, GST treatment and the proportion of the asset used for business purposes.

Who is eligible for the instant asset write-off?

For the 2025–26 income year, all business entities (sole traders, partnerships, trusts and compaies) may be eligible to use the instant asset write-off where:

• Its aggregated annual turnover is less than $10 million.
• It uses the simplified depreciation rules.
• The eligible asset's total cost is less than $20,000.
• The equipment is first used or installed ready for use by 30 June 2026.
• It is used for a taxable business purpose (not personal use).

The $20,000 threshold applies to the cost of each individual asset rather than the business’s total asset purchases for the year.

Eligibility may also depend on how the asset is used and whether GST is included in its cost.

Businesses should check the current requirements with their accountant or registered tax agent before relying on the instant asset write-off.

Is the instant asset write-off permanent?

The Australian Government announced in the 2026–27 Federal Budget that the $20,000 instant asset write-off would be made permanent from 1 July 2026.

Under the announced measure, eligible small businesses with turnover of less than $10 million would continue to be able to immediately deduct the business portion of eligible assets costing less than $20,000.

Making the instant asset write-off permanent would remove the uncertainty created by temporary annual extensions and give businesses more certainty when planning future investments.

What assets may qualify for the instant asset write-off?

The IAWO can apply to a range of depreciating assets used in running a business, including:

• Tools and equipment
• Computers and technology
• Office equipment and furniture
• Machinery
• Commercial kitchen equipment
• Safety equipment
• Some motor vehicles
• Eligible additions or improvements to existing depreciating assets

Both new and second-hand assets may qualify, provided the relevant requirements are met.

Some assets are excluded from the simplified depreciation rules or are subject to separate tax treatment. These may include:

• Assets leased or expected to be leased to another party for more than 50% of the time
• Capital works, such as buildings and structural improvements
• Horticultural plants
• In-house software where the business has allocated development costs to a software development pool
• Certain assets used in primary production that have their own depreciation rules
• Assets for which the business has chosen to apply specific depreciation provisions

For example, the construction cost of a new shed or an extension to business premises would generally be treated as capital works rather than claimed under the instant asset write-off. Similarly, some primary production assets, such as water facilities, fencing and fodder storage assets, may be covered by separate deduction rules.

Vehicles may be treated differently depending on the type of vehicle. An eligible vehicle may qualify for the instant asset write-off, but passenger vehicles are subject to a maximum amount that can be claimed for tax purposes.

Because the treatment depends on the type of asset and how it is used, businesses should confirm whether an asset qualifies before including it in an instant asset write-off claim.

The asset must be used for a business purpose. Where an asset is used for both business and private purposes, only the business-use portion may be deductible.

When does an asset need to be ready for use?

Purchasing or paying for an asset before the end of the financial year is not necessarily enough to claim the instant asset write-off.

The asset generally needs to be first used or installed ready for use by 30 June of the relevant income year.

For example, equipment ordered and paid for in June but not delivered and installed until July would generally be considered for a deduction in the following income year.

Businesses making purchases close to the end of the financial year should consider delivery times, installation requirements and any other work needed before the asset can be used.

Can a business claim the instant asset write-off for multiple assets?

Yes. The $20,000 instant asset write-off threshold applies to each individual asset.

This means an eligible small business may be able to claim an immediate deduction for several assets in the same income year, provided each individual asset costs less than $20,000 and meets the other requirements.

For example, a business may purchase three separate pieces of equipment costing $8,000 each. Each item may be considered separately for the instant asset write-off.

However, businesses cannot necessarily divide what is effectively one asset into several separate invoices or components to bring each amount below the threshold.

Whether several components are treated as separate assets may depend on how they are used, whether they can function independently and the overall nature of the purchase.

How does GST affect the $20,000 threshold?

Whether the cost of an asset includes GST for instant asset write-off purposes will generally depend on whether the business is registered for GST and entitled to claim GST credits.

For a GST-registered business that can claim the full GST credit, the GST-exclusive cost will generally be used when determining whether the asset falls below the $20,000 threshold.

For a business that is not registered for GST, the GST-inclusive cost will generally be relevant.

For example, equipment priced at $21,450 including GST has a GST-exclusive cost of $19,500.

A GST-registered business entitled to claim the full GST credit may therefore treat the asset as costing less than $20,000. A business that is not registered for GST may need to use the full GST-inclusive cost.

The treatment can be more complicated where the business is only entitled to claim part of the GST credit.

What happens if an asset costs $20,000 or more?

An asset costing exactly $20,000 or more does not qualify for an immediate deduction under the $20,000 instant asset write-off threshold.

How the asset is depreciated will depend on whether the business uses the simplified depreciation rules or the general depreciation rules.

Small business simplified depreciation rules

For an eligible small business using the simplified depreciation rules, an asset costing $20,000 or more will generally be added to the small business depreciation pool.

Rather than separately depreciating each asset, the business combines eligible assets in the pool and claims deductions based on the pool balance.

Assets added to the small business pool are generally depreciated at:

• 15% in the income year in which the asset is first added to the pool
• 30% of the remaining pool balance in each following income year

Unlike the instant asset write-off, this means the deduction is spread across several income years.

The remaining small business pool balance may be immediately deductible where it falls below the applicable instant asset write-off threshold at the end of an income year.

General depreciation rules

Businesses that do not use the simplified depreciation rules generally claim the decline in value of eligible depreciating assets under the general depreciation rules.

The business will generally calculate the deduction using either the prime cost method or the diminishing value method.

The available deduction will depend on factors including:

• The asset’s cost
• Its effective life
• When it was first used
• Its business-use percentage
• The depreciation method selected
• Whether any special depreciation rules apply

Prime cost depreciation method

The prime cost method, sometimes called the straight-line method, assumes that the value of an asset declines evenly over its effective life.

The formula is:

Asset’s cost × days held ÷ 365 × 100% ÷ asset’s effective life

For example, consider an asset costing $80,000 with an effective life of five years.

The prime cost depreciation rate would be:

100% ÷ 5 years = 20% per year

Where the asset is held and used entirely for business purposes for a full income year, the annual deduction may be:

$80,000 × 20% = $16,000

The business may claim a deduction of $16,000 each year until the asset has been fully depreciated, subject to any adjustments.

Where the asset is only held for part of the income year, the deduction would be reduced to reflect the number of days it was held and available for use.

Diminishing value depreciation method

The diminishing value method assumes that an asset declines in value more quickly during the earlier years of its effective life.

This method generally provides larger deductions in the earlier years, followed by smaller deductions as the asset’s remaining value reduces.

For many eligible assets, the general formula is:

Base value × days held ÷ 365 × 200% ÷ asset’s effective life

Using an $80,000 asset with an effective life of five years as a simplified example, the diminishing value rate would be:

200% ÷ 5 years = 40% per year

If the asset were held and used entirely for business purposes for the full year, the deductions may be calculated as follows:

• Year one: $32,000, based on 40% of $80,000
• Year two: $19,200, based on 40% of the remaining $48,000
• Year three: $11,520, based on 40% of the remaining $28,800

The deductions would continue to reduce as the asset’s base value declined.

These figures are simplified examples only. The actual deduction may be affected by when the asset was first used, its taxable-use percentage, its effective life and the depreciation rules that apply to the business.

Which depreciation method should a business use?

The prime cost method provides more consistent deductions across the asset’s effective life.

The diminishing value method generally provides larger deductions in the earlier years and smaller deductions in later years.

The method that produces the best result will depend on the asset, the business’s circumstances and the applicable tax rules.

Businesses may also be unable to change depreciation methods after choosing how to calculate an asset’s decline in value.

An accountant or registered tax agent can help determine:

• Whether an asset qualifies for the instant asset write-off
• Whether the simplified depreciation rules apply
• Whether the asset should be placed in the small business pool
• Whether the prime cost or diminishing value method is available
• The correct effective life of the asset
• The proportion of the asset used for a taxable business purpose

Does the instant asset write-off improve cash flow?

The instant asset write-off can support cash flow by bringing forward a tax deduction that would otherwise be spread across several years.

However, the business still needs to pay for the asset.

For example, purchasing an eligible asset for $15,000 does not provide the business with a $15,000 tax refund. Instead, the eligible amount is deducted from the business’s taxable income.

The actual tax benefit will depend on the business’s tax rate and whether it has sufficient taxable income to use the deduction.

The cash flow impact may also depend on:

• When the deduction affects the business’s tax payments
• Whether the business has taxable income or is making a loss
• How the asset is funded
• Loan repayments and interest expenses
• Installation and operating costs
• Ongoing maintenance expenses

A tax deduction can reduce the overall cost of an asset, but it does not remove the need to manage the upfront purchase and ongoing expenses.

Can a financed asset qualify for the instant asset write-off?

An eligible asset may still qualify for the instant asset write-off where it is purchased using finance.

The deduction is generally based on the eligible cost of the asset rather than the amount of loan repayments made during the income year.

However, the tax treatment may differ depending on the finance arrangement and whether the business owns the asset.

Interest and other finance costs may also have a separate tax treatment from the cost of the asset itself.

Businesses should confirm the treatment of hire purchase agreements, leases, chattel mortgages and other funding arrangements with their accountant or registered tax agent.

Should a business buy an asset to receive the deduction?

The instant asset write-off can make investing in eligible depreciating assets costing less than $20k more tax effective, but the purchase should still make commercial sense.

Before committing to an asset purchase, businesses may need to consider:

• Whether the asset is genuinely needed
• How it will improve productivity, capacity or revenue
• The total upfront and ongoing cost
• Whether the business has enough working capital
• How the asset will be funded
• When the asset will be delivered and installed
• Whether it will be ready for use within the relevant income year
• Whether the business has enough taxable income to benefit from the deduction

Purchasing an unnecessary asset solely to obtain a tax deduction can place additional pressure on cash flow.

The business will still spend more on the asset than it saves in its tax return.

Planning an asset purchase

The permanent extension of the $20,000 instant asset write-off announced in the 2026–27 Federal Budget is intended to give small businesses greater certainty when investing in equipment, technology and other productive assets.

Rather than making purchases based solely on whether a temporary tax measure will be extended, businesses can consider their asset requirements as part of their broader investment, funding and cash flow plans.

Before purchasing an asset, businesses should confirm:

• Whether the business meets the aggregated turnover requirements
• Whether the asset is eligible
• When it must be first used or installed ready for use
• Whether GST is included when applying the threshold
• How the purchase will affect working capital
• How the asset will be depreciated if it does not qualify

If you'd like help confirming the tax treatment of an asset and whether the instant asset write-off applies to your circumstances, please feel free to get in touch with us.

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