The Federal Budget has extended the $20,000 instant asset write-off until 30 June 2018, allowing 90,000 businesses to access it, so how can you make the most of it?
Small businesses were very happy with the Federal Budget announcement that the $20,000 instant asset write-off would continue for another year. The write-off is now available to more than 90,000 more businesses.
Thanks to a last-minute deal struck between the Government and Senator Nick Xenophon to past the Enterprise Tax Bill on 9 May, the write-off is now available until 30 June 2018.
If your business hasn't accessed this concession, it's important to understand how to take advantage of it this financial year to reduce your deductions.
Announced as part of the 2015 Federal Budget, the instant asset write of allows small business to immediately deduct business assets costing less than $20,000.
If your business is registered for GST, the cost of the asset needs to be less than $20,000 exclusive of GST. If your business is not registered for GST, then the cost must be inclusive of GST.
Originally, the $20,000 deduction limit was to reduce back to $1,000 on 30 June 2017. However, Treasurer Scott Morrison announced on Budget night that the $20,000 limit would continue until 3 June 2018.
In the context of the write-off, 'instantly deductible' 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). It is claimed in the business tax return.
The instant asset write-off only applies to certain depreciable assets, so it's important to check what you can write-off with your accountant first. For example, some assets such as horticultural plants, capital works (building construction costs etc), assets leased to another party on a depreciating asset lease and so-on, don't qualify.
Assets that cost $20,000 or more can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter.
Also, you need to be sure that there is a relationship between the asset purchased by the business and how the business generates income. You can't for example just go and purchase multiple television sets if they have no relevance to your business.
There are a few issues to be aware of if you want to utilise the instant asset write-off:
1. Does your business qualify?
To access the instant asset write-off, your business needs to:
- Be a trading business (the entity buying the assets needs to carry on a business in its own right).
- Have an aggregated turnover under $10 million. Aggregated turnover is the annual turnover of the business plus the annual turnover of any "affiliates" or "connected entities".
The aggregation rules are there to prevent businesses splitting their activities to access the concessions. Another entity is connected with you if:
- You control or are controlled by that entity; or
- Both you and that entity are controlled by the same third entity.
2. Should you spend the money now?
If there are purchases and equipment that your business needs, that equipment has an immediate benefit to the business, and your cashflow supports the purchase, then in many cases it will make sense to 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. But, your business still needs to fund the purchase for a period of time until you can claim the tax deduction and then, the deduction is only a portion of the purchase price.
3. Assets must be ready to use
If you want to access the $20,000 immediate deduction, you have to start using the asset in the financial year you purchased it (or have it installed ready for use). This prevents business operators from stockpiling purchases and claiming tax deductions for goods they have no intention of using in the short term.
So, if your business purchases an asset on 20 May 2017, it needs to be used or installed and ready to use by 30 June 2017 to qualify for the immediate deduction this financial year.
4. Second hand goods qualify
The instant asset write-off does not distinguish between new or second hand goods. For example, second hand machinery may qualify if it meets the other requirements.
5. The immediate deduction can be used more than once
Assuming all the other conditions are met, an immediate deduction should be available for each individual item costing less than $20,000. Just be careful of cashflow.
6. Be careful of contracts
You need to ensure that any contract you sign makes your business the owner of the asset and that the asset can be used or installed and ready to use by the business on or before 30 June to claim it in this year's tax return.
The rules require you to "acquire" the asset before 30 June so the wording of the contract will be important.
7. Assets for business and pleasure
Where you use an asset for mixed business and personal use, the tax deduction can only be claimed on the business percentage.
If you buy an $18,000 second hand car and use it 80% for business and 20% for personal use, only $14,400 of the $18,000 is deductible.
The instant asset write off is a tax deduction that reduces the amount of tax your business has to pay. It enables your business to claim a deduction for depreciating assets in the year the asset was purchased and used (or installed ready to use).
For example, if your business is in a company structure the most you will 'get back' is 27.5% (in 2016-17). If your business is likely to make a tax loss for the year then the bigger deduction might not provide any short-term benefit to you.
Contact us on 02 9957 4033 for more information about how the instant asset write-off works or if you are looking at how to make the most of it.
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.