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5 Questions: Small Business & the $20k deduction

August 2015

5 Questions for the $20k Deductions

The immediate asset reduction was broadly welcomed by small business in May's budget, however many business owners don't full appreciate how it works. Here are 5 key questions about the $20k deduction. 

The immediate asset reduction was broadly welcomed by small business in May's budget, however many business owners don't full appreciate how it works. Here are 5 key questions about the $20k deduction.

The Australian Treasurer announced earlier this year that small businesses would benefit from the $20,000 immediate asset write off and for many small businesses, it was a welcome measure. However there has been some mis-selling and misunderstanding about how the immediate deduction actually works. 

In a recent speech, Small Business Minister Bruce Bilson stated that a lot of his time talking about the $20,000 immediate deduction for small business was convincing people it was not a hand out. 

"I have spent a lot of my time explaining that asset write-off mechanisms aren't grants, they are not gifts, they are not cash backs.  They are a way of expensing a purchase in an asset that can contribute to a functioning business.  Now, if you are not making any income there is not a huge benefit in you being able to write-off additional expenses at a faster rate."

In our previous bulletin we highlighted some of these issues, however we've picked the top 5 questions we are getting from small business owners: 

If I spend $20,000 how much will I get back?

The instant asset write-off is a tax deduction that reduces the amount of tax your business has to pay. It enables small businesses with annual aggregated turnover below $2 million to claim a deduction for depreciating assets of less than $20,000 in the year the asset was purchased and used (or installed ready to use).  

An example:

If your business is in a company structure, then the most you will "get back" is 30% (in 2014/15) or 28.5% (in 2015/16) of the cost of the asset. So say your business bought an asset worth $19,000 in June 2015, the most it would reduce your tax by is $5,400. It's a better deal than the previous $1000 immediate deduction limit, but as a business, it needs to be managed in the context of the business's cash flow and it's a cost the business would have been able to deduct anyway – just over a longer period of time. 

If I signed a contract before Budget night but didn't pay for the asset or receive it until after the Budget, can I still claim the deduction?

To be able to claim the immediate deduction, you had to "acquire" the asset on or after 7.30 pm AEST on Budget night (12 May 2015) and use it (or install it ready for use) before 30 June 2017.  

Contracts are often tricky because the date you acquired the asset really depends on what the contract says and how it's structured.  Generally, if you signed the contract before Budget night and the contract made you the owner of the asset, then the asset would not qualify for the $20k immediate deduction.   

We've invested in new equipment for just under $18,000. How soon can we claim the immediate deduction?

'Immediate deduction' is a bit of a misnomer and in this context means that your business can claim a tax deduction for the asset in the same income year that the asset was purchased and used (or installed ready for use).  The deduction is claimed on the business's tax return.  

One of the catches of the immediate asset write off is the requirement for the asset to be used or installed ready to use. The purpose of this catch is to prevent the stockpiling of assets to simply claim the deduction. 

Can I buy multiple items and claim the immediate deduction even though the total being claimed is more than $20,000?

Yes. As long as you acquired the asset on or after 7.30 pm AEST on Budget night (12 May 2015) and use it (or install it ready for use) before 30 June 2017, then an immediate deduction should be available if each individual item costs less than $20,000.

Don't forget about the cash flow implications.  Depending on when you purchase the assets it might be another year before you can claim the deduction.  

What sorts of assets can I claim an immediate deduction for?

We've had some very interesting questions from people wanting to know what they can and can't claim the immediate deduction for.  To be able to claim the $20,000 immediate deduction, the asset needs to be a depreciating asset.  A depreciating asset is an asset whose value you expect to decline over time, such as computers, furniture, and motor vehicles, which are not investment assets. 

Artwork is a great example. A local art gallery tells you that your business can buy anything up to $20,000 and claim an immediate deduction for it. Is this correct? The answer is, it depends. 

There has to be a connection between the artwork and your business for it to be a depreciating asset.  For example, the artwork could be displayed in your office reception or waiting area. The Tax Office says that the life of an artwork for tax purposes is 100 years.  So, deducting the artwork immediately is a big tax bonus.  

The same principle applies to items that relate to an existing asset, like machinery.  If what you are purchasing qualifies as a depreciating asset in its own right, then you can claim it.   

Whatever the asset is, the same principles apply.  

Your business needs to qualify as a small business entity, the asset needs to be purchased and used (or installed) after Budget night and before 30 June 2017, the asset must cost less than $20,000, and the asset must be a depreciating asset.  Not everything will qualify.

Need further guidance on the immediate asset write-off? Contact our team on 02 9957 4033 to discuss how it will benefit or impact your business. 

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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