Instant asset write-off provisions now unlimited for businesses with an aggregated turnover of under $5 billion

The Federal Government legislated a further extension and expansion of the instant asset write-off provisions on 14 October 2020. They have removed the asset cost base limit (or threshold) and the instant asset write-off provisions are now available until 30 June 2022. Also, for the first time, businesses with an aggregated turnover of $500 million or above, but under $5 billion, are eligible to benefit.

Below we comment on six things to be aware of when considering the instant asset write-off provisions:

      1: How they benefit a business
      The benefit of the instant tax write-off provisions is that they enable a tax deduction for a qualifying asset purchase to be made in full in the year of purchase, rather than being limited to being claimed progressively over the effective life of the asset. As an example – a eligible company purchases a qualifying asset at $20,000. The impact on the taxable income in the year of purchase is an approximate tax saving in that year of $5,500, rather than this being spread of the effective life of the asset.

      2: Eligibility and the available threshold is determined by the business turnover level and when the asset is purchased and installed ready for use
      The table below shows the asset cost base threshold for the instant asset write-off provisions both currently and over the last few years, along with the corresponding business aggregated turnover limits.

      Instant asset write-off thresholds

      3: It is normally only applicable to assets purchased through the main trading entity
      It is common for businesses to be structured with an asset holding entity and a trading entity. The asset holding entity leases their assets for use by the trading entity. This is generally done with view to asset protection in the event of litigation.

      If this applies to your situation and you are interested in the instant asset write-off provisions, please discuss with your accountant before entering purchase arrangements.

      4: Not all asset types qualify – some are excluded
      Some asset types have been specifically excluded from the instant asset write-off provisions. These include:

        1. Capital works, for example building constructions and improvements
        2. Horticultural plants
        3. Software that has been allocated to a software development pool
        4. Assets that have been allocated to a low-value assets pool
        5. Assets that you lease out, or expected to lease out, for over 50% of the time on a depreciating asset lease.

      For excluded assets, you are required to use the general depreciation rules.

      5: Passenger vehicles are subject to a car cost limit for depreciation purposes
      A specific car cost limit of $59,136 (for the 2020-21 income tax year) applies to purchases of passenger vehicles that have been designed to carry a load of less than one tonne and less than nine passengers. What this means is if you spent say $80,000 on a car for your business in October 2020, you can only claim $59,136 as an instant tax write-off in the 2020-2021 income tax year. The remaining $20,864 cannot be depreciated under any other rules as it is above the cost limit, despite the fact that the instant tax write-off threshold applicable at the time of purchase is unlimited.

      The car cost limit generally increases each year.

      6: It’s only useful where you have the cash to buy the asset and the asset is a good investment for your business
      The instant asset write-off provisions do not cover the full cost of a new asset for your business. The business needs to be able to cover all the costs of a new asset by itself. The benefit of the provisions would be seen in a reduced tax liability on the next tax return for the business, which could be up to a year away. Whether your tax return results in a cash refund is dependent on the overall business performance – a refund is not guaranteed simply by an instant asset write-off deduction being claimed.

      Note it may be possible to adjust approaching PAYG instalments in light of the expected impact of a instant asset write-off deduction. This could return a faster cash flow benefit than waiting until the next tax return is assessed.

If you are considering purchasing assets and claiming the costs under the instant asset write-off scheme, please contact us on 03 5339 3200 or contact us here, so we can confirm whether the intended purchase would qualify or not.

Thanks for reading.

The information contained on this website has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.

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