Business Tax Tips: Take advantage of the $20,000 instant asset write off now!
In May 2015 the Federal Government increased the instant asset write off thresholds for small businesses from $1,000 to $20,000. This has been extended to the end of the 2017-2018 financial year, finishing on the 30th of June 2018.
The end of the financial year is almost here which means the next week may be the last opportunity to take advantage of this generous tax break. While there was a proposal in the latest federal budget to extend this incentive until 30 June 2019, this change is not legally approved yet.
Who can benefit?
The tax rule applies to small businesses. A small business is a business that has a turnover of under $10 million per year.
What is the $20,000 instant asset write off?
The Federal Government’s instant asset write off scheme is an incentive to encourage small businesses to invest in themselves by spending more on capital equipment. The scheme allows businesses to claim accelerated depreciation on the full value of income producing assets purchased up to the value of $20,000 (for each purchase) instead of claiming the deductions over a number of years. Simply put, the full cost of assets under the value of $20,000 used for business purposes can be plugged into your profit and loss statement for the year as an expense item. Prior to the introduction of the measure, the instant asset write off threshold for small businesses was $1,000 and items over this value would be put on a fixed asset register and then would be deducted as an expense over the course of its lifetime.
For example: A baker buys an oven for his business for $15,000 and it has a working life of 10 years. Previously, we would say that the oven is deducted over the 10 year period at a maximum amount of $1,500 per year. The new rule means that he can claim the full deduction in the same year that he bought and installed it.
Keep in mind that the $20,000 limit is not a total for the tax year, instead it is a total amount per purchase and there can be any number of $20,000 purchases written off in a single tax year.
What the $20,000 instant asset write off is not.
Many people have confused this new tax rule to be a tax refund. You cannot get a tax refund for the value of the item. What you can do is decrease your taxable profit by the value of the item and this will lower your tax bill.
For example: If you are a business owner, and you spend $20,000 on a capital purchase, you will receive a 28.5% deduction which equates to a $5,700 reduction on your tax and means that you will still be out of pocket by over $14,000 on the purchase. Hence, it is not wise to use this as a tax saving device.
Is it worth it?
If you need to upgrade a key piece of equipment, or if there are pieces of technology that you can buy to make your business more efficient it is a great idea to take advantage of this generous tax scheme. But if you are looking to reduce your tax bill and don’t actually need the equipment, then it’s probably not a good idea.
Other points to be aware of.
1. To include GST or not to include GST in the cost? If you are registered for GST the amount that you can claim is GST exclusive and your instant asset write off threshold is $20,000 exclusive of any GST. This is because you will claim as a credit the GST paid in your activity statement for the relevant period. If you are not registered for GST, you include the GST amount you paid on the asset in your depreciation calculations and your instant asset write off threshold is $20,000 inclusive of GST.
2. The asset must be installed and ready to use before the end of the financial year otherwise you cannot claim the deduction until the following tax year.
3. You must subtract the private use proportion. You can only claim the proportion of the value of the asset that is used for business use. E.g. If you buy a new laptop for $3000 and 20% of the time it’s for personal use then you can only claim 80% or $2,400 as a business write off.
4. The entire cost of the asset must be less than the instant asset write off threshold irrespective of any trade in amount or the proportion used for business use. Consider this situation. A business decides to trade in their work ute which is valued at $12,000 for a new work ute valued at $26,000. It would be tempting to consider this a $14,000 purchase (the difference in value between the two) but in fact it is not. The purchase of the new ute for $26,000 would fall outside of the $20,000 limit and could not be claimed instantly.
For more information, and the ATO rules on the $20,000 asset write off, visit the below website: