The $20k Question: Should you use the Instant Asset Write-off?
Cash flow, necessity and eligibility are key considerations when deciding whether to buy new assets for your business. Make sure you understand how the $20,000 deduction works.
The 2015 Federal Budget sparked a flurry of marketing and sales activity around enticing small business owners to part with their cash for immediate tax deductions of up to $20,000.
Small businesses with a turnover of $2 million or less make up 97.5% of all Australian businesses and the latest ATO statistics show that well under half actually paid net tax. For that segment of SMEs, the $20,000 instant write off has limited value, because a business needs to be making a profit to pay tax and to get the benefit.
While its job was to get SMEs spending and stimulating the economy, the reality is that the deductions are really only useful to profit-making enterprises.
For SMEs not making a profit, spending on assets for the business is likely to achieve one thing: increase the size of the losses without the corresponding offset. Losses can often be carried forward into future years but you lose the benefit of the immediate deduction.
There is a lot of misinformation in the market right now, and it's important to understand how the concession applies to your business.
As at the publication of this article, the legislation has been brought before Parliament, therefore business owners should approach spending with some caution. The ATO has only the capacity to assess on current law, not announcements.
While it's unlikely that the Opposition and minor parties will block the measure's passage through Parliament, there is a small risk that things will change. Don't forget, few of last year's Budget measures made it through unchanged (if at all).
The upshot? Don't spend more than your business can afford.
Available cash flow within the business is far more important than an immediate deduction. For businesses that qualify for the deduction, there are four key questions:
- Does the business need the purchases and equipment?
- Does the equipment have an immediate benefit to the business?
- Does your cash flow support the purchase until you can claim the deduction?
- Do you understand the 'true cost' of your purchases?
If the business is able to satisfy the questions above, then go ahead and spend the money. The $20,000 immediate deduction applies as many times as you like so you can use it for multiple individual purchases.
Being able to answer these questions is the first step. It's also important to remember that the deduction is also only a portion of the purchase price.
Let's take the example of a small bakery. The bakery is in a company structure and has a taxable income for 2014/2015 of $49,545. The owner purchases a new $13,750 oven on 2 June 2015 and installs it straight away. The cost of the oven is claimed in the bakery's 2014/2015 tax return resulting in a tax deduction of $13,750.
So, for the $13,750 spent on the oven, $4,125 is returned as a reduction of the company's tax liability (i.e., 30% company tax rate in the 2015 income year). For the bakery, they need the cash flow to support the $13,750 purchase until the businesses tax return is lodged after the end of the financial year. With the $4,125 reduction of the company's tax liability, the business has fully funded the remaining $9,625.
From 1 July 2015, the bakery would also receive the small business company tax cut of 1.5%. If the business also had taxable income of $49,545 in the 2016 income year, the tax cut would provide a reduction of $743.
It's important not to rely on the advice of the person you are purchasing any tools or equipment from. While they may be well intended (or out to exploit the opportunity), getting guidance from your accountant will ensure that you're not only taking care of your cash flow, but also setting up appropriate record keeping for new assets.
Contact us on (02) 9957 4033 for more information about the Instant Asset Write-Off, your cash flow and your eligibility for the deduction.
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.