Updated 8 April 2020
You should be cautious of making investments that take cash out of your business at this time. Whilst this measure provides for a generous tax deduction, the focus right now should be on conserving cash.
To access the new instant asset write-off threshold of $150,000 your business needs to:
- Be a trading business (the entity buying the assets needs to carry on a business in its own right), and
- Have an aggregated turnover under $500 million. Aggregated turnover is the annual turnover of the business plus the annual turnover of any “affiliates” or “connected entities”. The aggregation rules are there to prevent businesses splitting their activities to access the concessions. Another entity is connected with you if:
- You control or are controlled by that entity; or
- Both you and that entity are controlled by the same third entity.
In order for a small business with aggregated turnover of less than $10 million to access the $150,000 threshold the asset needs to have been acquired after 7.30pm (AEST) on 12 May 2015 and it needs to have been first used or installed ready for use for a taxable purpose between 12 March 2020 and 30 June 2020.
If the business has aggregated turnover of $10 million or more then, the $150,000 threshold only applies if the asset was acquired after 7.30pm (AEDT) on 2 April 2019 and it needs to have been first used or installed ready for use for a taxable purpose between 12 March 2020 and 30 June 2020.
The write-off only applies to certain assets you buy. The instant asset write-off only applies to certain depreciable assets such as a concrete tank for a builder, a tractor for a farming business, and a truck for a delivery business. There are some assets that don’t qualify although the restrictions are slightly different depending on whether the business has aggregated annual turnover of less than $10 million or not. For example, small business entities cannot apply these rules to assets such as horticultural plants or assets leased to another party on a depreciating asset lease, etc. The rules cannot apply to capital works (building construction costs etc.) regardless of the turnover level of the business.
You will also need to ensure that there is a relationship between the asset purchased by the business and how the business generates income. You can’t for example claim deductions for television sets if they have no relevance to your business.
How is the support calculated?
The instant asset write-off enables your business to claim an upfront deduction for the full cost of depreciating assets in the year the asset was first used or installed ready for use for a taxable purpose.
For example, if your company’s turnover is under $50m and you purchase an eligible asset for $140,000 (GST-exclusive) on 1 June 2020 (and install it ready for use by 30 June 2020), then a deduction of $140,000 can be claimed. If the company is subject to a tax rate of 27.5% then this should reduce the tax payable by the company for the 2020 income year by $38,500.
If your business is likely to make a tax loss for the year, then the instant asset write-off is unlikely to provide a direct short-term benefit to you. However, if this measure is likely to reduce the taxable income of the business for the year then it may be possible to vary upcoming PAYG instalments to improve cash flow.
If the asset is a luxury car then the deduction will be limited to the luxury car limit. The business use percentage of the asset also needs to be taken into account in calculating the deduction. For example, if a sole trader acquires an asset for $40,000 but only expects to use it 80% in the business then the immediate deduction would be $32,000.
The increase to the instant asset write-off threshold in the stimulus package is the fourth increase or extension and businesses will need to be wary of what they are claiming and when:
|Instant asset write-off thresholds||Small Business*||Medium business**||Large business***|
|1 July 2018 – 28 January 2019||$20,000||–||–|
|29 January 2019 – 2 April 2019||$25,000||–||–|
|3 April 2019 – 12 March 2020||$30,000||$30,000||–|
|12 March 2020 – 30 June 2020||$150,000||$150,000||$150,000|
* aggregated turnover under $10 million
** aggregated turnover under $50 million
***aggregated turnover under $500 million
At this stage it is expected that the instant asset write-off threshold will reduce back to $1,000 from 1 July 2020.
How is the support provided?
The instant asset write-off is a tax deduction that reduces the tax liability of your business. It is triggered when you lodge the business’s 2019-20 tax return.
Low general pool balances for small business entities
The changes also ensure that a $150,000 threshold applies in determining whether the balance of a small business entity general pool is deducted in full in the year ending 30 June 2020.
That is, the rules ensure that the entire pool balance is written off if the business has a SBE pool and the result of the formula below is less than $150,000 as at 30 June 2020:
- Start with the opening balance of the pool for the year;
- Add the business use percentage of any assets added to the pool for the year;
- Less the business use percentage of any assets disposed of during the year.
If the result of the formula above is less than $150,000 then the business claims a deduction for that amount in the 2020 tax return and the pool balance becomes nil. Note that the formula above does not take into account the current year depreciation deduction amount for the pool.