The $20,000 instant asset write-off

It’s still not law.

That said, the Labour Party has given their consent to it and the bill passed the Lower House of Parliament at the end of last week.  Hopefully the Senate will see fit to pass it.

I therefore now take this opportunity before year end to set out our understanding of how this will work.

What is it

  • A small business buying an asset to use in its business will be able to claim the full cost of that asset as a tax deduction provided the asset itself costs less than $20,000.

It appears to be available to

  • Small businesses only.
  • It appears that a small businesses will be defined as one with turnover under $2,000,000 (excluding GST) in either the current or preceding year.  Under this definition, it doesn’t matter if the current year’s turnover is $5,000,000 provided the previous year’s turnover was under $2,000,000.  Please note that this is the expected definition of a small business being the core definition – there are other definitions of a small business within the Tax Act for different provisions therein.
  • The turnover of related entities will be taken into account for the purposes of the $2,000,000 turnover threshold.
  • Assets costing less than $20,000 (excluding GST).
  • If your business is not registered for GST then the cost limit appears to be $20,000 including GST.
  • It appears not to matter whether the asset is new or second hand.

Things to watch out for and to take advantage of

  • The cost of the asset must be under $20,000 (excluding GST).  So, if one buys a new car for $25,000 ex GST and gets a trade-in of $6,000 for an old vehicle, then one will not be entitled to claim the full cost of the deduction – one’s entitlement is measured solely against the cost of the acquired asset itself.
  • If an asset is used partly for business and partly for private purposes (like a passenger car or laptop computer) then only the business portion can be claimed as a deduction.
  • The benefit is the cost of the asset which can be claimed as an expense.  So, for a company, the saving on the purchase of a $10,000 asset (excluding GST) is $3,000 of tax that would otherwise be paid.
  • If an entity has current year and/or carried forward losses in excess of the cost of the asset(s) acquired then there will be no tax benefit in the current year.
  • The asset must be acquired and installed ready to use by the end of the year for a tax deduction to be claimed in this financial year.  A simple order cannot be deducted nor can an asset that has yet to be installed ready and available for use.
  • Please consider whether you really need the asset.  In the case of an asset costing $10,000, the best result is that a company saves $3,000 in tax; it is still $7,000 out of pocket.
  • If you really need to buy an asset costing less than $20,000 (excluding GST) now is the time to do so.
  • Be careful not to spend too much to the detriment to your cash flow.  It may be best to consider finance.
  • Don’t lease an asset though.  A lease is a rental contract.  As such, one is not the owner of a leased asset until the last payment is made or the contract is paid out early.  Under hire purchase or chattel mortgage contracts though, one is the owner of the asset from day one.
  • The $20,000 limit applies to each individual asset; like or similar items need not be grouped.  A small business can claim a $40,000 deduction should it see fit to buy 20 $2,000 lap-tops.

Thinking of buying a new car?  Click on the following link to an article in last week’s Age which listed cars under $20,000.

http://www.theage.com.au/drive/motor-news/feature-20000-tax-bargains-20150602-ghf2xi.html

So, if you really need an asset for your business, now is the time to buy it if you are a small business.  Even if these laws aren’t passed, a small business under current laws will be able to claim 15% deprecation in this financial year even if an asset is bought in the last week of June with a further 30% deduction of the residual balance in 2015/16.  On the other hand, an asset bought in July 2015 will only result in a 15% deduction for the whole of the 2015/16 year.

Please call us should you wish to discuss your situation at greater length.

At MRS, we will spend today planning for your future success.

At MRS, we will spend today planning for your success.