IMPORTANT NOTE: From Thursday 12 March 2020, the instant asset write-off threshold was increased from $30,000 (for businesses with an aggregated turnover of less than $50 million) to $150,000 (for businesses with an aggregated turnover of less than $500 million). This is for assets first used or installed ready for use between 12 March 2020 until 30 June 2021, and purchased by 31 December 2020.
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If you are running a business and your annual turnover is less than $50 million, you can reduce the amount of business tax you pay by taking advantage of the instant asset write-off scheme.
How does the instant asset write-off work?
The instant asset write-off scheme allows you to claim a tax deduction for the cost of any assets you buy in the current financial year that cost less than $30,000. Before the scheme was introduced in the 2015/16 financial year, businesses could only claim a tax deduction for the depreciation of all business assets over several years.
Examples of typical business assets that can be written-off under the instant asset write-off scheme include business vehicles, office equipment and tools.
It’s important to understand that the $30,000 threshold value applies to each asset that you buy in a financial year, not to the combined value of all the assets you buy. This important point is best explained with an example.
A business owner buys two new pieces of equipment and a new office vehicle in a financial year. The first piece of equipment is valued at $20,000. The second piece of equipment is valued at $25,000. The business vehicle is valued at $40,000.
The business owner will be eligible to claim both pieces of equipment as a tax deduction in the current financial year. This is because the individual value of each piece of equipment is less than the instant asset write-off threshold of $30,000. Further, this is the case even though the combined cost of both new pieces of equipment ($40,000) is over the $30,000 threshold.
However, the business owner will not be able to claim the cost of the motor vehicle due to the cost ($45,000) exceeding the $30,000 instant asset write-off threshold.
What about assets over the value of $30,000?
Individual assets that cost over the value of $30,000 cannot be written off under the instant asset write-off scheme. The cost can still be progressively written off as a depreciation expense over several years (based on the estimated effective life of the asset).
Recent changes to the instant asset write-off scheme
The instant asset write-off scheme was introduced for the 2015/16 financial year. Initially, only businesses with an annual turnover of less than $10 million were eligible for the scheme and the maximum value of individual assets that could be written off was $20,000.
However, both the annual turnover and individual asset value thresholds were increased for the 2018/19 financial year to the current levels ($50 million and $30,000 respectively). These new thresholds came into effect during the 2018/19 financial year and transitional arrangements were put in place to reflect the different thresholds that were in place for part of the 2018/19 financial year.
The instant asset write-off scheme is currently scheduled to be in place until the end of the 2019/20 financial year. However, it may be extended.
The benefits of the instant asset write-off scheme
This most obvious benefit of the instant asset write-off scheme is that it reduces the amount of business tax that you have to pay.
However, another way of looking at it is that it reduces the cost of assets that you need to buy for your business by the amount of tax that you save. This point of view is best explained with an example.
Suppose a business has a sole trader or partnership structure. The individual owners or partners in these types of businesses pay marginal rates of tax based on their individual taxable income levels. These marginal rates of tax for the 2019/2020 financial year are outlined in the table below.
|Taxable income||Tax payable|
|0 – $18,200||Nil|
|$18,201 – $37,000||19 cents for each dollar over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5 cents for each dollar over $37,000|
|$90,001 – $180,000||$20,797 plus 37 cents for each dollar over $90,000|
|$180,001 and over||$54,097 plus 45 cents for each dollar over $180,000|
If a business owner or partner has a taxable income of $85,000, their total tax bill will be:
$3,572 + 0.325 x ($85,000 – $37,000)
= $3,572 + (0.325 x $48,000)
= $3,572 + $15,600
However, if they write-off $30,000 worth of assets in the financial year, their taxable income will reduce to $55,000. Their total tax bill will then be:
$3,572 + 0.325 x ($55,000 – $37,000)
= $3,572 + (0.325 x $18,000)
= $3,572 + $5,850
This example has a tax saving of $9,750. The real ‘out of pocket’ cost of the asset/s bought by the business owner is therefore only $20,250 (i.e. $30,000 less the $9,750 tax saving), not the full cost of $30,000.
Suppose a small business has a company structure (rather than a sole trader or partnership structure). The current company tax rate in Australia is 27.5% for businesses with an annual turnover less than $25 million (and 30% for businesses with annual turnovers of $25 million or more).
Imagine that a trading company has a turnover of $500,000 and that its net taxable income is $100,000. The tax payable would be $27,500 (i.e. 0.275 x $100,000).
However, if the company purchased assets of $30,000 during the financial year and wrote them off under the instant asset write-off scheme, their net taxable income would reduce to $70,000 and their tax payable would reduce to $19,250 (i.e. 0.275 x $70,000).
The tax saving would be $8,250 (i.e. $27,500 less $19,250). The real ‘out of pocket’ cost of the asset/s bought by the company is therefore only $21,750 (i.e. $30,000 less the $8,250 tax saving), not the full cost of $30,000.
The bottom line
If you are not taking advantage of the instant asset write-off scheme for business assets that you buy that cost less than $30,000 (and the annual turnover of your business is less than $50 million), you are paying more tax than you need to pay.
However, it is important that you buy business assets for the right reasons. You should not just purchase assets to get a tax deduction. Any business assets that you buy:
- should be put to good use to help you to maintain or grow your business, and
- should not unnecessarily tie up your cash flow (as cash flow problems can be a cause of business failure).
Save Tax With $30K Instant Write Off Scheme
It is worthwhile to engage a tax accountant to help you determine if your business can take advantage of the instant asset write-off scheme. One of our experienced tax planning advisors at Wilson Pateras would be happy to take the time to understand your business and provide you with appropriate advice. Contact us today!
This article contains general advice only. It does not take into account your or your business objectives, financial situation or needs. You should seek advice from a financial planner, accountant or other professional adviser before making any financial decision based on this information.