One of the best tax breaks for small to medium sized business is the instant asset write-off, which is a great way for businesses to acquire capital assets and obtain an immediate tax deduction.
As part of the Federal Governments recent Coronavirus Stimulus Package, the instant asset write off threshold has increased from $30,000 to $150,000 (net of GST) per asset acquired and now applies to businesses with an aggregated annual turnover of less than $500 million.
This measure will apply to all purchases made from 12 March 2020 to 30 June 2020 where the assets are used, or installed ready for use, in the business by 30 June 2020.
Examples of tax-deductible items
Some of the items that you could look at purchasing before 30 June 2020 include:
Cash registers and other POS devices
Cars, vans and utes
Fittings and fixtures
Plant and machinery
Computers and laptops
To ensure compliance with the tax rules, here are some key tips:
You have to be in business to claim the instant asset write-off – having an ABN is not enough.
Both new and second-hand assets qualify.
Understand that this tax break is not a cash hand-out but a deduction that reduces your taxable profit. If you operate as a company and spend say $40,000 on a capital purchase (net of GST), then assuming a tax rate of 27.5%, the company will receive a 27.5% deduction which equates to a $11,000 reduction in tax. This means that the company will still have a net cash outlay of $29,000 on this purchase.
The $150,000 limit is worked out on a GST exclusive basis. This means that if your business is registered for GST and claims an input tax credit on the purchase, the tax deduction is worked out net of GST.
Your business may purchase and claim a deduction for each asset that costs less than the $150,000 threshold. For example, on 16 April 2020 your business purchased a piece of machinery costing $50,000 (net of GST) and then prior to 30 June 2020 purchases a new car costing $40,000 (net of GST). The business can claim both of these as each of the assets as an immediate tax deduction in the 2019/20 year as both assets cost under the $150,000 threshold.
The asset must be used, or installed ready for use by 30 June 2020. This is particularly important if the business purchases the asset just before the end of the financial year. For example, if the asset is purchased say on 29 June 2020, but not available for use in the business until 7 July 2020, then the business loses the entitlement to claim an immediate tax deduction for the asset in the 2019/20 year. Instead the business can claim ordinary rates of depreciation on the asset in the 2020/21 year and following years which may include the 50% accelerated depreciation rate announced as part of the Governments COVID-19 stimulus package.
Don’t forget to pro-rate the deduction for private use – to claim the full deduction, the asset has to be used solely for business purposes. If you operate as a sole trader or in a partnership and there has been some personal use of the asset, the deduction needs to be pro-rated to reflect this. The deduction is not pro-rated where you operate as a company or a family trust, but fringe benefits tax (FBT) may apply to the private use of the asset by employees (FBT on company cars is a common example).