‘Instant Asset Write Off’ explained for your business
Updated: March 12th, 2020 (following the Stimulus package announcement )
The Instant Asset Write Off - what is it and how can your business utilise it?
A key feature of the 2015/16 Federal Budget (and subsequent Federal Budgets since) was the $20,000 Instant Asset Write Off scheme for small businesses – a scheme which has proven to be very popular with Small Business Owners. The $20,000 Instant Asset Write Off scheme allows business owners to immediately write off depreciable assets that cost the business less than $20,000.
Due to the recent coronavirus pandemic, the Federal Government is expected to bring forward decision to bring forward the instant asset write-off and increase it from $30,000 to $150,000.
The Morrison Government confirmed on Thursday that the write-off threshold would be lifted to $150,000 and extended to businesses with a turnover of up to $500 million, from $50 million.
The cut-off date to take advantage of the increased limit is June 30. New equipment, computer hardware, office fit-outs, furniture and vehicles are amongst the potential assets, that can be written off.
This new measure is expected to decrease taxes paid by Australian businesses by $2.5billion over the next two years.
What does this actually mean?
As you know, deductions are typically available for purchases that are made by your business, for your business. The purpose of the $150,000 Instant Asset Write Off is to accelerate the speed at which you can make deductions for those purchases.
Since the commencement of the scheme, small businesses (ATO definition of small business) have been able to instantly deduct business assets that cost $150,000 or less. This allows business owners to claim a deduction for that asset in the same income year as the asset was purchased. This deduction is then able to be claimed on the business’s tax return for that income year.
How is this different to the previous Asset deduction rules?
The main difference is that until May 12th, 2015, businesses were only able to instantly write off assets up to $1,000. Assets that exceeded $1,000 were only able to be written off partially every year, in accordance with the relevant depreciation rate for the class of asset.
Since the introduction of the $150,000 Instant Asset Write Off, businesses can now write off the cost of the asset (providing it is $30,000 or under) in the same financial year as they bought it instead of the ongoing depreciation rules that previously applied (and still do apply to assets that cost greater than $150,000).
What about items that cost more than $150,000?
Assets that you have purchased in this income year that are greater than $30,000 can be allocated to a pool, and then be depreciated and deducted – albeit at different rates. Check with your Accountant or Tax Advisor for more information on your individual circumstances.
Does this mean I get a $150,000 tax refund for each asset?
No. The $150,000 Instant Asset Write Off scheme means that you can reduce the amount of tax that your business has to pay. This means that if your business is structured as a “company”, the most you would “get back” would be the current company tax rate of 27.5%.
What about Assets that are also used personally?
If you buy an asset for your business that you also use personally, you can only write-off the equivalent percentage that is used for business purposes. As an example, if you were to buy a $1500,000 piece of machinery for your business, that 80% of the time was used for business purposes, and 20% of the time was being used for personal purposes, you would only be eligible to write off $120,000 (the 80% of the total asset cost).
Additional points to consider before rushing out to purchase Assets
Assets must be ready to use: To be eligible to write off your new assets, they must be either installed and in-use, or purchased and ready for use in the same financial year as it was purchased. This means that you can’t claim the $30,000 Instant Asset Write Off for a purchase that was finalized in June 2018, but that won’t be installed or operation until September 2018, for example.
How long will the Instant Asset Write Off be available? Initially launched in the 2015/16 financial year, the Federal Government has continued to extend the scheme on a year-by-year basis.
There is no guarantee, however, that the Government will continue the scheme in the 2020/21 financial year, so this could be the final year of the increased $150,000 threshold before being reduced back to the original $1,000 cap.
Does every “Small Business” qualify? The write off is only available to small businesses with an aggregate turnover of less than $50,000,000. Further, the entity that is purchasing the asset must be trading business – meaning that the entity conducts business in its own right.
Is every business asset eligible to write off?
No. Whilst most assets are, there are a number of asset classes or types that the ATO has excluded from the scheme. These include capital works assets, horticultural plants (including grapevines) and more. Check with your Accountant or Tax Advisor for more information on your individual circumstances.
Is it wise to invest now to take advantage of the $30,000 Instant Asset Write Off?
It may be wise for you to take advantage of the $30,000 Instant Asset Write Off if your business has the cash flow to support the purchase/s, and that you can have the asset either operational or ready for use in this financial year.
Finstro offer various finance options for Australian businesses, including trade finance, invoice finance and debtor finance. Call the team at Finstro to find out more about these options and their suitability for your business.
The information provided on this website is general in nature only and does not constitute personal or commercial financial or taxation advice. The information has been prepared based on our interpretation of the IAWO program and has not taken into consideration your personal or business objectives, financial situations or needs. Before acting on any information on this website, or others, you should consider the appropriateness of the information with regard to your personal or business objectives, financial situations or needs. Speak to your Accountant, Tax Advisor or the Australian Tax Office for any questions you may have with regard to the application of the Instant Asset Write Off for your business.