The popular $20,000 instant asset write-off for small business entities, which enables small businesses to immediately write-off depreciable assets costing less than $20,000, is now accessible to 90,000 more businesses.
Until recently, this instant write-off was only accessible to businesses with an aggregated turnover of less that $2 million. But, a last minute deal struck between the government and Senator Nick Xenophon to pass the enterprise tax Bill – containing amongst other things the tax cuts for business and a change in the small business threshold – extends this concession. The Bill passed Parliament on 9 May 2017.
For businesses that have not previously accessed this concession, it’s important to understand how you can take advantage of it this financial year to maximise your deductions.
What is the $20,000 instant asset write-off?
A deduction is generally available for purchases your business makes. The instant asset write-off however changes the speed at which you can claim a deduction. Since 7.30pm, 12 May 2015, small businesses have been able 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, it is $20,000 including 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 (see Budget 2017-18: What it means to you and your business)
When we say “immediately deductible” we mean 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.
Assets costing $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.
The instant asset write-off only applies to certain depreciable assets. There are some assets, like horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc., that don’t qualify – check with us first if you are uncertain.
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.
How can you access the $20,000 instant asset write-off
There are a few issues to be aware of if you want to utilise the instant asset write-off:
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). It also needs to 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.
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.
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.
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.
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.
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.
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.
You don’t get $20,000 back on tax as a refund
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.
The deal to pass the enterprise tax Bill
The tax rate reductions for business and changes to the small business threshold were announced in the last Federal Budget but have been stuck in the Senate with concerns that it was merely a ‘sugar hit’ for the top end of town. However, a last minute deal between the government and Senator Nick Xenophon saw the Bill pass Parliament but exclude large businesses with a turnover of $50 million or more from any tax cuts or concessions.
The negotiated Bill enables:
- An increase to the aggregated turnover threshold to $10 million for access to small business tax concessions from 2016-17. This means that any businesses with a aggregated turnover of under $10 million can now access a raft of concessions previously only accessible to small businesses under $2 million. The main concession left out is access to the small business CGT concessions, which still requires the entity to pass a $2 million turnover test or a $6m net asset value test.
- Progressive reductions in the corporate tax rate for businesses with a turnover under $50 million. Businesses with an aggregated turnover of less than $10 million will benefit from a company tax reduction to 27.5% this financial year, and
- For unincorporated businesses such as sole traders, partnerships and trusts:
- An increase to the aggregated turnover threshold to $5 million (up from $2 million) for access to the small business income tax offset from 2016-17, and
- An increase to the unincorporated small business tax discount to 8% from 2016-17. The offset will be capped at $1,000.
The new corporate tax rates
|Year||Aggregated Annual Turnover Threshold||Entities under the Threshold||Other Corporate Tax Entities|
|2019–20 to 2023-24||$50m||27.5%||30.0%|
If I can help you with any questions you might have about the $20,000 immediate deduction, just contact me or any of the Hayes Knight team. We are happy to clarify any issues for you.