20K Instant Asset Write Off - What are the Rules?
Businesses with a turnover of less than $10 million can access the accelerated depreciation advantages of a small business in the current financial year.
This instant asset write-off has been extended for another financial year.
The advantage for eligible businesses, is for equipment or vehicles that cost $19,999 or less can be fully depreciated in the first year. This entitles the business to claim a deduction for the $19,999 and subsequently this can result in reducing the tax liability of the business by $5,500 (assuming this business operates in a company).
Alternatively, equipment or vehicles purchased that exceed $20,000 will be treated as shown below:
- The asset will be added to the depreciation pool and 15% depreciation will be claimed.
- Each subsequent year, 30% will be able to be claimed until the asset is fully depreciated.
This is great news for small businesses to help bolster the economy, and provide small business with the necessary assets to grow. Surprisingly, it appears that there are more than 60% businesses not utilising the write-off due to lack of cashflow and confusion of how the scheme works. So we’ve spelled out the program in more detail so you’ll be clear of the rules.
How does the Asset Write-Off actually work?
The scheme allows small businesses to purchase business-related items and be able to depreciate that item fully in the first year. So, for a small business that is eligible they can spend up to $20,000 on as many single assets as needed (including items bought second hand), depreciate these fully whilst also reducing their taxable income, which means less tax is payable.
How do you know if you are eligible?
To be eligible for this scheme, your business turnover needs to be less than the turnover threshold. The current 2017-18 financial year the turnover threshold is $10 million. Eligible businesses can then write-off any business assets purchased for a cost of less than $20,000 each (i.e. if you purchase two eligible assets worth $19,000 each – you can claim full depreciation on both).
How is the cost of the asset determined?
The cost of each item must be under $20,000. The entire cost of the asset must be less than this limit, irrespective of any trade-in amount.
Importantly, the cost of an asset includes both the amount you paid for it and the cost of transporting and installing it ready for use. The cost also includes any amounts you may have spent on improving the asset.
GST Treatment: If you are registered for GST, you exclude the GST amount you paid on the asset when you calculate your depreciation amounts (and your instant asset write-off threshold is $20,000 exclusive of any GST). This is because you will claim the GST paid as a credit in your activity statement for the 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 any GST).
When you trade a car or any other asset, the agreed price of your trade-in is deducted from the cost of your new asset. The sale and purchase of the asset generally appear as one transaction.
However, under the simplified depreciation rules, the transactions are considered separate. If the purchase price of your asset is $20,000 or more, then it needs to be added to the small business pool and cannot be immediately written-off.
Note that if you later sell or dispose of an asset for which you claimed an instant asset write-off under the scheme, the taxable purpose proportion of the amount you received for the asset is included in your assessable income.
What business assets are eligible?
There are various assets eligible under this $20,000 instant asset write-off scheme. These include:
- Air conditioners
- Office, shop, studio furniture and fittings
- Work vehicles
- Kitchen equipment
- Equipment storage (sheds etc)
- IT hardware (desktop computers, laptops, printers etc)
- Tradie tools and machinery
This is only a minor list, but it provides an idea of what assets are considered under this small business tax incentive scheme. If you’re considering a purchase and not sure if it complies, give our team a call first.
How to take advantage without impacting your cash flow?
Thinking of the word ‘instant’ when talking about this small business tax break – you must remember that it is not as immediate as people like to think. The instant refers to claiming the depreciation as a once-off in that financial year’s tax return thus receiving the benefit of reduced tax payable. For some businesses, taking a short-term loan to purchase these much-needed business assets is a viable option without hurting their cash flow. As this tax break has only been extended for another year by the government, there are no guarantees that it will become a permanent feature so eligible businesses are encouraged to take advantage if cash flow permits.
If you would like more information or need to discuss this tax incentive in more detail, please contact your PJT Business Advisor on 5413 9300.