Looks like “back to a better future” could be the motto of the Liberal government following Budget 2015. The announcement of an instant tax deduction for assets costing up to $20,000 is a reversal from last year, when they reduced the instant tax deduction for assets costing up to $6000 to a lower limit of $1000.
See the update on this topic following the 2016 Federal Budget.
This also a “limited time offer” with the instant deduction applying to assets purchased from budget night until June 30, 2017.
In any small business, cash flow is the number one concern. These measures essentially mean that a taxpayer can bring forward deductions where they wouldn’t otherwise have been able to do so.
Any small business with turnover of less than $2,000,000 can purchase assets up to the value of $20,000 and get an immediate tax deduction for them rather than having to write them down over the following years.
In addition, assets valued at $20,000 or more can continue to be placed in the small business simplified depreciation pool (the pool) and depreciated at 15% in the first income year and 30% thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
What is a depreciating asset?
Let’s be clear what type of business assets we are talking about. A depreciating asset is an asset used in a business that has a limited effective life and is expected to decline in value over the period you use it. Vehicles, office furniture and equipment are depreciating assets. Land, computer software, items of trading stock and certain intangible assets (goodwill) are not depreciating assets.
What qualifies? What can I buy?
Here are a few ideas:
- IT hardware such as desktop computers, printers, scanners and photocopiers, butÂ not in-house software where the firm intends claim under the software development pool rules*
- Office or shop furniture and fittings, such as new tables for a cafe
- Display screens, kitchen equipment, signage and air conditioners
- Work vehicles, such as a $19,999 Ute. Just wait for the EOFY Advertisements!
- Tradesmen’s tools and machinery
- Plant and equipment
- Sheds or storage containers for storing equipment.
Tips and traps
- This tax concession is ideal for those businesses that were planning to purchase assets anyway or have a real business need to update equipment. If it can improve your bottom line (net profit) then look at taking advantage of the opportunity.
- If you purchase before 30 June 2015, you will get 30 cents back in tax. Purchase after 1 July 2015 and before 30 June 2017 and you will get 28.5 cents back.
- The reality of the ability to pool assets costing more than $20,000 will be that small businesses must purchase assets before June 30, 2015 to ensure that a deduction can be claimed for the written down value in the 2017 financial year.
- The devil will be in the detail, but the instant write off for an asset pool with a value of less than $20,000 would appear to also apply to existing asset pools. This could mean businesses with existing asset pools can claim a full tax deduction for that pool for the 2015 financial year if its written down value is less than $20,000.
- This is not a grant or allowance, and you should not rush out to buy any asset before checking with your accountant. If your business is not making a profit, then a tax deduction is of no use to you.
- If your business is expected to make profit next year or the year after, then you may better off waiting to use the deduction in those tax years.
- Don’t take on unnecessary debt just chasing a tax deduction. Interest rates are at 40-year lows but will not stay here long term.
- Don’t be tempted to bend the rules in order to claim the deduction, as the Australian Taxation Office will be watching closely and will no doubt devote compliance resources to scrutinising these claims.
- Beware of the definition of “small business” especially if you are part of a group of companies. In order to qualify for these concessions, businesses must align with the Australian Taxation Office (ATO) definition of a small business, which is an individual, partnership, trust or company with an aggregated turnover of less than two million dollars. An aggregated turnover is the annual turnover of any business that an individual is connected or associated with.
If used wisely, the instant deduction can be a real benefit to profitable small businesses that were planning on purchasing assets anyway. Talk to your accountant to be sure.
The changes in the Federal Budget will affect every business on July 1. Subscribing or upgrading your software will ensure your business is always compliant with tax changes, including the government’s new SuperStream system for paying super contributions.
*Editors Note 17 June: ‘not software’ corrected to ‘not in-house software where the firm intends claim under the software development pool rules’.