The 2015 Budget announced that small businesses (those with aggregate annual turnover less than $2m) would be able to immediately write off depreciating business assets that cost less than $20,000 and claim the cost as a tax deduction. The legislation in respect of the changes has now been passed by Parliament and will apply to assets acquired from 7.30pm on 12 May 2015 until 30 June 2017. This will replace the previous instant asset write-off threshold of $1,000. It applies on a per asset basis, so any number of assets each costing up to $20,000 would qualify for the write-off if installed ready for use before 30 June 2017.
If the entity is registered for GST then the GST exclusive amount is taken to be the cost of the asset. Where the entity is not registered for GST then the GST inclusive amount is taken to be the cost of the asset.
For assets costing more than $20,000, small businesses can elect to use the pooling arrangements and depreciate the cost of such assets at 15 per cent in the first year and 30 per cent each year thereafter. The low pool value threshold will also increase to $20,000 meaning that an immediate deduction is available if the depreciated balance of the pool is less than $20,000 at the end of an income year that ends on or after 12 May 2015 but on or before 30 June 2017.
All assets (including new and second hand) will be eligible, with the exception of a small number of exclusions which receive different depreciation treatment. Excluded assets include horticultural plants and in-house software allocated to a software development pool. Any software purchased off the shelf, costing less than $20,000 will be eligible. A small business can also claim an immediate deduction for the cost of developing software for use exclusively in its business where the cost is less than $20,000 provided that it has not been allocated to a software development pool. Leased assets will not be eligible as they are not regarded as owned by the small business.
Misconceptions & Traps
The tax write off will not result in a reduction of the tax liability or refund of the same amount as the cost of the expenditure. The tax liability reduction will be the amount of the marginal rate of the taxpayer. For a company this will be 30% and as an example a $10,000 claim will result in a tax saving of $3,000. The tax claim for an individual taxpayer will depend upon the individual’s marginal tax rate. For a trust it will depend upon the marginal tax rate of the beneficiary.
The tax claim results in a timing difference for the taxation reduction. The full claim in the year of purchase will result in no depreciation claims for that asset in future years. Under the previous rules the deduction was spread over a number of years depending upon the depreciation rate. In some instances it is possible that the overall tax saved will be less if the current year deduction places the taxpayer into a lower tax bracket than the future years.
If the asset is sold the amount of the sale value net of GST will need to be included in the taxable income in the year of the sale. This will in effect give back part of the tax claimed.
Overall, the deduction can be a real benefit to small businesses but be sure to discuss it with your accountant.