Small Business Asset Write-Off in Australia

Small Business Asset Write-Off in Australia

The Australian Government provides various tax incentives for small businesses to encourage growth, investment, and productivity. One of the most significant of these incentives is the small business asset write-off, also known as the instant asset write-off. This tax provision allows eligible businesses to immediately deduct the cost of most depreciating assets, providing valuable cash flow benefits. This comprehensive guide covers a broad aspect of the small business asset write-off in Australia.

What is the Instant Asset Write-Off?

The Instant Asset Write-Off (IAWO) is a tax deduction that allows small businesses (eligible businesses) to immediately write off the cost of eligible assets in the year they are purchased, rather than depreciating the cost over several years (over the life of assets). It reduces taxable income and provides an immediate tax benefit to the businesses.

The IAWO applies to depreciating assets used in the business, such as machinery, plant and equipment, furniture, and motor vehicles.

Eligibility Criteria for Instant Asset Write-Off

To be eligible for the instant asset write-off, a business must meet specific conditions including:

• Business Size: The business must be classified as a small business entity (SBE), meaning it has an aggregated annual turnover of less than $10 million.

• Asset Usage: The asset must be used for business purposes. If an asset is used for both business and personal purposes, only the portion of the asset used for business can be claimed.

• Asset Cost: The cost of the asset must be below the threshold set for the tax year in which it is purchased and installed. Moreover,

 the asset must be ready for use in the income year the write-off is claimed.

Threshold Limits for Asset Write-Off

The threshold for the instant asset write-off has varied over time, based on the government policy changes. Here is a summary of the thresholds for different periods:

From 6 October 2020 to 30 June 2023: There was no upper limit on the cost of assets eligible for the instant write-off. Businesses could claim unlimited immediate deductions under the Temporary Full Expensing (TFE) rules during this period.

From 1 July 2023: The threshold is $20,000 per eligible asset purchased by the business.

Temporary Full Expensing (TFE)

In response to the economic impact of COVID-19, the Australian Government introduced Temporary Full Expensing. This provision, which began on 6 October 2020, allowed businesses to immediately deduct the full cost of eligible depreciating assets purchased and installed by 30 June 2023.

Key Features of TFE:

• No limit on asset value: Businesses can write off the full cost of assets, regardless of the value.
• Available for new and second-hand assets: Unlike previous schemes, businesses can claim second-hand assets, provided they meet the criteria.
• Eligible for larger businesses: Businesses with an aggregated turnover of less than $5 billion can access the TFE scheme.

Pooling of Assets

Businesses that choose not to use the instant asset write-off or are ineligible for the TFE scheme can still benefit from simplified depreciation rules for small businesses, including the small business pool.

How Pooling Works:

1. Assets valued at more than the instant asset write-off threshold are added to a small business pool.
2. Assets are depreciated at 15% in the first year and 30% for each following year.
3. If the balance of the pool falls below $150,000 at the end of the income year, the entire pool can be written off.

Eligible Assets for Write-Off

Almost all tangible depreciating assets used in the businesses are eligible for the write-off. Common examples include:

• Motor vehicles (cars, vans, trucks, etc.)
• Machinery and equipment (excavators, tools, factory machineries)
• Office furniture and fittings (desks, chairs, partitions)
• Technology (computers, servers, printers)

However, certain assets are not eligible, including:

• Horticultural plants and capital works deductions (buildings or structural improvements).
• Assets leased out by the business for income-generating purposes.

Business Use Percentage

If an asset is used for both personal and business purposes, only the portion used for business can be claimed as a deduction. For example, if a car is used 70% of the time for business and 30% for personal use, only 70% of the purchase price of the car can be claimed under the instant asset write-off.

GST Implications

The cost of the asset for tax purposes is based on whether the business is registered for GST.

• If registered for GST, the deduction is based on the GST-exclusive cost.
• If not registered for GST, the deduction is based on the GST-inclusive cost.

For example, if you are a business registered for GST that purchases an asset for $11,000 (including $1,000 GST) can claim a $10,000 deduction. If the company is not registered for GST, it can claim the full $11,000.

Timing of the Write-Off

To qualify for the instant asset write-off, the asset must be:

1. Purchased and installed for use in the relevant financial year.
2. Ready for use (not merely ordered) within the same financial year.

If the asset is not used or ready for use until the next financial year, it cannot be claimed in the year of purchase but in the next year.

Record-Keeping Requirements

Businesses must maintain appropriate records to substantiate their claims. This includes:

• Receipts or invoices showing the cost of the asset.
• Records of when the asset was purchased and installed.
• Usage records to show how much of the asset was used for business purposes.

Interaction with Depreciation Rules

The instant asset write-off overrides the usual depreciation rules. Instead of depreciating an asset over several years, the business can claim the full deduction in the year of purchase. However, if an asset is not eligible for the instant write-off, it may still be depreciated under the usual small business depreciation rules.

Impact on Cash Flow and Financial Planning

One of the key benefits of the instant asset write-off is the immediate reduction of taxable income, which can help small businesses lower their tax liability in the year of purchase. This can significantly improve cash flow, especially for businesses investing in expensive assets.

Potential Pitfalls and Limitations

While the instant asset write-off is beneficial, there are potential challenges and limitations:

• Business Use Requirement: Assets must be primarily used for business purposes to qualify. Misuse of this rule may lead to hefty penalties.
• Threshold Changes: Frequent changes to threshold limits can cause confusion for businesses planning their asset purchases over time.
• No Deferral of Deductions: If a business purchases an asset but does not want the deduction in that year, it cannot defer the deduction to a later year.

Conclusion

The instant asset write-off is a valuable tool for small businesses in Australia, providing immediate tax benefits and improving cash flow. Understanding the eligibility criteria, thresholds, and how it interacts with other tax rules are crucial for making the most of this incentive. For businesses planning to invest in new assets, this scheme can significantly reduce the cost of doing so, allowing them to grow and expand with more financial flexibility. Please contact Budgetwise Accountants to ensure the tax laws are correctly applied while you are benefiting from instant asset write-off to maximise benefits for your business.