BREAKING NEWS (As of 12 September 2018)!!!
The $20,000 Instant Asset Write-off has FINALLY been passed by the Senate and will become law for the 2019 year. Watch our video and read all the benefits of the Write-off below …
(The Government’s Media Release regarding the Senate’s decision can be read http://jaf.ministers.treasury.gov.au/media-release/006-2018/.
Why does it exist, What is the benefit to your business and How do you access it?
The popular Small Business Tax Break has been extended (or at least is expected to be) for another year.
The $20,000 Instant Asset Write-off has actually been with us a few years now, but it does still sometimes get overlooked, and the precise qualification criteria does have its tricks and traps.
But first, the most important thing to know right now is …
As at the date of writing, being July 2018, the Instant Asset Write-off is NOT YET LAW for the 2019 year!
And while at this stage no one expects it not to become law for 2019. Just be aware there is always a chance it may not, or that when it finally does, some of the rules discussed below may have changed.
Having said that, assuming it does become law as expected, the key things you need to know about the $20,000 Instant Asset Write-off are detailed below.
Before we start however we will note that many people refer to the $20,000 Instant Asset Write-off as the “Small Business Tax Break” but this can be a bit misleading. There are actually a number of tax concessions that collectively are generally considered to be the small business tax breaks available in Australia, so we will only refer to this particular one as the “$20,000 Instant Asset Write-off” …
Why does it exist?
In short, the Government is looking to achieve three things from the extension of the Instant Asset Write-off –
- Encourage Australian small business to spend and therefore maintain economic activity and the flow of cash throughout the system,
- Encourage Australian small business to invest in (and therefore hopefully expand and grow) their businesses,
- Provide Australian small business with some tax relief for the 2019 year.
In his Media Statement released at the time the legislation was first introduced into Parliament (following the 2019 Budget) the Treasurer, Scott Morrison, stated …
“Around 3.3 million small businesses across the country with an annual turnover of less than $10 million are eligible to access the $20,000 instant asset write-off.
The extension of this initiative benefits hardworking Australian small businesses, improving their cash flow and providing a boost to business activity and investment for another year.“
And per the Budget Papers (Budget Paper No. 2: Budget Measures 2018-19) the Government indicate they believe …
“The measure will improve cash flow for small businesses, providing a boost to small business activity and investment for another year.”
What is the benefit to your business?
So the benefit of the scheme is pretty simple … you pay less tax for the 2019 year if you purchase equipment costing more than $1,000 but less than $20,000 during the year, than would be the case if the Instant Asset Write-off no longer existed.
That is because you get to claim a tax deduction for the entire outlay in the 2019 year, instead of having to spread the tax deduction over a number of years as would normally be the case under the normal depreciation rules.
And therefore this means over the course of the time period from when you purchase and pay for the new equipment, to when you pay your tax for the 2019 year, your business’ cash flow will be better than it would be if the Instant Asset Write-off wasn’t still in place.
The benefit can be illustrated as follows –
|Cash Flow Item||With Instant Asset Write-off||Without Instant Asset Write-off|
|Cash Out: Purchase of New Equipment||-$20,000||-$20,000|
|Reduced Cash Out: Tax Saved at Tax Time (Assuming Top Tax Marginal Rate)||$9,400||$1,410|
|Net Cash Out: Over the period from purchase to the time your tax is due||-$10,600||-$18,590|
|Improved Short Term Cash Flow||$7,990|
How do you qualify for the Instant Asset Write-off and receive its benefits?
For the 2019 year, again assuming the scheme becomes law as expected, the qualification criteria are as follows –
Criteria 1 – Your business must qualify as a “Small Business Entity”
You are a small business entity if you are a sole trader, partnership, company or trust that:
- operates a business for all or part of the income year, and
- has an “Aggregated Turnover” less than $10 million (the turnover threshold).
Your business’ “Aggregated Turnover” is its total normal business income (otherwise known as its revenue) for the year plus the total normal business income of any related or associated businesses.
So if you or your partnership, company or trust does not operate a business (ie. it just owns passive investments like shares, property, etc) then you DO NOT qualify as a Small Business Entity and can not use the Instant Asset Write-off.
There are actually a few different ways to calculate your Aggregate Turnover for the purposes of this criteria so if you believe you are close to the threshold, or just over, Get in Touch and let us know and we can work you through the different methods and determine if you can still qualify.
Criteria 2 – You must have incurred expenditure on an Eligible depreciable asset during the year that cost less than $20,000
Basically any piece of equipment (including motor vehicles, computers, and the like) that is used in your business will qualify except for the following exclusions –
- assets that are leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease
- assets you allocated to a low-value pool before using the simplified depreciation rules
- horticultural plants including grapevines
- software allocated to a software development pool (but not other software)
- capital works (buildings and associated structural type elements of a property).
See below for further discussion regarding the tricks and traps associated with meeting the $20,000 cost requirement.
Criteria 3 – The Eligible Asset must be used, or installed ready for use, within the business on or before 30 June 2019
An example provided by the ATO is a trailer that was purchased and stored in the shed but not yet fitted out for the intended business purpose by 30 June. In such a case the trailer would not be eligible because it has not been used nor is it installed ready for use.
Buying it last minute online but not taking delivery until after the end of the financial year will also not count.
Tricks, Traps and the Fine Print
What is and isn’t Included in the Cost (Criteria 2)?
The cost includes both the actual price of the asset PLUS any additional amounts you incurred on delivery, transportation and installation.
So something that costs $19,990 but cost $500 for delivery, will not count!
Goods & Services Tax (“GST”)
If there is GST included in the purchase price (and/or delivery, transportation or installation) and you can claim back the GST from the ATO, the GST IS NOT included in the cost.
However if you can not claim back the GST from the ATO, the GST IS included in the cost.
If you can only claim part of the GST included, then only that part you claim can be taken out of the cost for the purposes of Criteria 2.
So if your business is registered for GST and you acquire a depreciable asset used 100% for business purposes and it is actually used (or installed ready for use) before 30 June 2019, it could cost as much as $21,999 and so long as it includes a full 1/11th GST ($1,999.91 as shown on the Tax Invoice), you can instantly write off the entire GST exclusive cost of $19,999.09!
A trade-in does not reduce the cost of the asset. It may reduce how much you pay, but there is value in a trade-in and that value is still effectively paid. So the full price of the asset, including the actual cash outlay plus the value of the trade-in is included in the cost.
So a car that costs $25,000 which you acquire with a trade-in of $6,000 leaving a payment of only $19,000 WILL NOT be eligible, because its cost for the purposes of Criteria 2 is still $25,000.
What about part private part business use?
Like with virtually all aspects of tax laws, you can only claim a tax deduction for the portion of an expense incurred for business (or income derivation) purposes. So if the asset is used partly for business purposes but also partly for private purposes, then you can only claim a portion of the cost equal to your business use percentage.
For example, if you are a sole trader and you purchase a car for $15,000 which you use 50% for business (per your log book) and 50% privately, then you can only claim a deduction for $7,500 under the Instant Asset Write-off, not the full $15,000.
Be Careful with Motor Vehicles
Lots of business owners like to access this form of small business tax break by purchasing a motor vehicle. But many get it wrong and don’t find out until its too late!
First, as indicated above, the cost of the motor vehicle has to be under $20,000, not the cash you pay after a trade-in.
Second, many people just assume that the price they pay for a vehicle includes 1/11th GST. And therefore they assume they can pay $21,999 for the car because when you deduct 1/11th ($1,999.91) the cost becomes less than $20,000.
The purchase price of a motor vehicle includes Stamp Duty and Motor Vehicle Licensing, neither of which have GST on them.
So you must ensure that the price you pay (including Stamp Duty and Motor Vehicle Licensing) less the actual amount of GST on your Tax Invoice (which you must obtain from the Dealer) which you are entitled to claim equals less than $20,000.
Also be careful with Assets that are part of a Set, or Multiple Assets that are substantially all the same
If an asset is part of a set, then you must combine all elements of the set when assessing the cost (Criteria 2).
Per the ATO, whether items form a set is determined on a case-by-case basis. But items may be regarded as a set if they are either;
- interdependent on each other
- marketed as a set
- designed and intended to be used together.
An example would be a boardroom suite including table and chairs. Each individual chair and the table may each cost less than $20,000, but if the combined cost of the “set” is more than $20,000 then the Instant Asset Write-off won’t apply to any of them.
Similarly, if you buy 50 chairs for a seminar room, even though the cost of each chair might be under $20,000, if the combined cost of all 50 chairs is more than $20,000, because they are all identical (or just substantially the same) the Instant Asset Write-off can not be claimed for any of them.
Final warning … Don’t just buy something in order to qualify for the Instant Asset Write-off if you don’t actually need it, or don’t at least need it soon!
Sure, the Government is trying to encourage small businesses to spend more, but you must still make wise business decisions. And buying an asset that you don’t really need, or don’t really need for some time yet, all just because you want to qualify for the Instant Asset Write-off is not a wise business practice!
Something many small business owners seem to conveniently forget is that you have to spend money in order to get a tax saving AND the tax saving is never as much as the money you spent. So if you don’t really need the asset you are going to spend money on, why do it? You will still be behind even if you feel like you got a tax advantage or otherwise had a win over the tax man.
This warning applies doubly if you can’t actually afford the asset you don’t really need, and so instead you decide to buy it anyway and put it on finance. This just creates a whole extra cost (interest) and again, even if you can claim a tax deduction for the interest paid, the tax saving is still always less than the interest paid, so you are still out of pocket and in fact out of pocket even more.
So avoid being distracted by every new shiny thing, like a new (or extended) tax break. It is only of value to you, if you otherwise needed to incur the cost in the first place!
Not Sure How to Choose the RIGHT Accountant and Adviser for You, Your Family and Your Business?
Download our FREE Report entitled the “Business Owners & Investors Due Diligence Checklist: The 7 Critically Important Questions Business Owners & Investors MUST Ask Before Hiring an Accountant if you Want to Pay Less Tax and Stay Out of Trouble with the ATO”.
The Report includes the 7 Critically Important Questions, PLUS as a Complimentary Bonus it includes 9 Wealth Building Strategies 90% of Accountants NEVER Reveal to their Clients (Because they Don’t Know Them Themselves).