Instant Asset Write Off and The Economic Response Package
Instant Asset Write Off Explained
You want to pay as little tax as possible, something I’m sure most of us would agree to?
Depreciation of Assets is one deduction that is utilised to reduce your taxable profit, aka pay less tax.
Normal deprecation methods would provide you with a deductible amount over several years – usually inline with the useful life of the asset, such as a vehicle, IT equipment, Large props or Machinery, Cameras and accessories etc. Sort of providing the cost of the asset as a deduction in drips and drabs until it reaches its life expectancy, such as a computer which you could write off over 3 years.
Instant Asset Write off is used as a way to fast track this process on assets purchased within the allowable limit, by allowing you to deduct the cost of the asset in its first year of use/installation.
What is an Instant Asset Write Off?
An Instant Asset Write Off means you can deduct the cost of the asset straight away, instead of depreciating and deducting its cost over several years. It can be for a few assets or just one.
PLEASE NOTE! Instant Asset Write-Off is not a cash refund. You don’t get back the amount you spent on the asset. Just like any other business expense, it is a deduction that reduces your taxable profit.
If you purchased the asset for personal use as well as business use, then it would be the business portion of the cost that qualifies for the Instant Asset Write Off.
Typical business assets that you would purchase would be; business vehicles, tools, IT or office equipment. A tradie might buy new power or hand tools, a tool box system or a ute, where as influencers or entrepreneur labels might buy new a new computer, camera, backdrop and lighting props for photoshoots, or sound gear for podcasting.
The threshold value is applicable to EACH asset you purchase. And if your items don’t reach this value, then you can pool them and apply the threshold against it.
This deduction is made available to eligible businesses who ordinarily have an aggregated turnover of less than $50 million. This turnover limit has since been increased to $500 million as part of the Economic response package from the government in relation to COVID19. Similarly, the limit of the asset value to which you can write off had increased from $30,000 to $150,000.
There are, however, additional temporary changes from 6th of October 2020 to 30th June 2022 which have allowed for a larger net to capture eligible businesses as well as the threshold limit :
- Assets you start to hold and first use (or install to use) from 7:30 pm 6th of October 2020 until 30th June 2022 have NO threshold limit (can go beyond the $150,000 limit)
- Business portion of the cost of the new asset for businesses with an aggregated turnover under $5 billion (corporate entities that satisfy the alternative test)
- Business portion of the cost of a second hand asset for businesses with an aggregated turnover under $50 million
- The balance of a small business pool at the end of the income year within this temporary period for businesses with an aggregated turnover under $10 million
Car limit
Now this doesn’t mean you can go out and buy a $90,000 vehicle and write it off completely… there are specific car limits (as discussed in our previous article” Do I buy a car through the business or personally?”within the threshold.
The car limit for FY21 is $59,136. That means you can write off the car to that value only.
So, your $90,000 car would only have an instant deduction of $59,136. You can’t then depreciate the balance of $30,864 under any other depreciation rules.
And that’s assuming you use the vehicle 100% for business. If it is a smaller percentage such as 75%, you can only claim 75% of the car limit. Which would mean you’d be claiming only $44,352 in an instant write off.
Is it worth it?
If your business is not taking advantage of the instant asset write off, then you’re really paying more tax this year than you need to.
However, BIG ‘However’… It is important that you are buying assets for the right reasons. You shouldn’t purchase assets just to get a tax deduction.
If you need that new camera equipment, car, laptop, power tool, then sure go for it!
Be mindful, that by opting for the instant asset write off, you are unable to make any deductions to the asset in future years. You’re taking the full benefit now. This could have an impact on your subsequent years tax payable.
An Example
Lets say you’re a sole trader earning a taxable income of $80,000 each year over 3 years.
That means your tax would be $5,092 and then 32.5c for every $1 over $45,000.
As you can see, you haven’t received $34,000 in CASH worth of deduction on your return. Much like every other business expense you incur throughout the year that sits on your profit and loss statement, it is a deduction that reduces your tax payable.
Its whether you receive the benefit of a larger deduction in that 1st year, or whether its worth spreading the love around. Your taxable income will fluctuate each year, that first year might be a lot lower than your following years and you’ve now lost the benefit of that deduction. This is when tax planning and business forecasting comes in handy. You’re able to utilise your snapshot of your business plans and potential revenue and profit margins, which will assist in determining whether its beneficial to take the deduction straight up or spread it out over several years to assist in reducing larger tax obligations in the subsequent years. If you don’t have a forecasted cashflow or tax plan in place, please reach out as we’d be more than happy to assist you in putting one together.
So to recap…
Are you Eligible?
· Annual turnover is less than $5 billion
· Asset is first used or installed ready for use between 6th October 2020 – 30th June 2022
How it works
· Full cost of each eligible Asset is deductible
· Currently no Threshold
· It is not a cash refund
· You can’t use instant asset write off and other depreciating methods on the one asset
Please note, this article includes a summary of the changes announced by the Government. For full details, you can visit the Budget 2020-2021 page on the government website, or get in contact with someone on our team to walk through your options