The Australian Government has announced an increase in the instant asset write-off from $30,000 to $150,000 in response to the economic impact of the coronavirus. The increased limit is in effect until 30 June 2020.
Amid novel coronavirus (COVID-2019), this is likely to be welcome news for many Australian SMEs. In 2017-18, there were more than 360,000 businesses that benefited from the instant asset write-off scheme. Here’s why, and what that means.
What's the instant asset write-off scheme?
The instant asset write-off scheme enables you to write off the entire amount of asset purchases up to the specified limits. It started in 2011 with a limit of $1,000 and has been raised several times since then. In addition, the scheme has been expanded to apply to businesses with up to $500 million in annual turnover. In the past, a business purchasing an asset could only write off a portion of an asset expense over several years. By deducting the full expense in a single year, you can decrease your taxable income and the tax you owe.
How does the instant asset write-off work?
With the instant asset write-off, you can deduct the full cost of an asset up to the threshold amount in the year that it’s purchased and installed. This applies to a range of assets, including:
- Tools and machinery
- IT hardware – computers, laptops, monitors, printers
- Machinery and equipment
- Office and shop furniture and fittings
- Kitchen equipment
- Air conditioners
- Motor vehicles
You could say nearly everything, including the kitchen sink. So when you purchase an asset for business use, you don’t have to depreciate it and claim the costs over time.
The challenge for many small businesses is the delay in cash flow between purchasing the asset and receiving the tax benefit and a return on investment. It can take years.
An example of the expanded instant asset write-off in action
Nick runs a bakery and wants to upgrade to a new high-capacity oven. On 31 March 2020, he buys a new oven for $40,000, exclusive of GST, and has it installed and operating by 10 April. Under the previous limit of $30,000, this asset wouldn’t qualify for the instant asset write-off and have to be expensed over several years. Since he purchased it after 11 March 2020, he can claim the full amount in the 2019-2020 financial year. At the small business company tax rate of 27.5 per cent, Nick will reduce his tax bill by $11,000 as a result of the purchase.
As always, consider the details
There are several factors to consider before acquiring an asset and using the instant asset write-off scheme.
As with any business decision, we suggest that you consult with your accountant to determine whether utilising the instant asset write-off scheme is the right move for your business.
Here are a few more details:
- The asset purchase can be new or used.
- The deduction needs to be made in the financial year that you’ve used or installed the asset for business purposes. So if you purchase an asset in June 2020, but it’s not delivered and installed until July 2020, you will need to claim it in the 2020-2021 financial year.
- You can only claim the portion you use for business. For example, if you purchase an asset that is used 50 per cent for business purposes and 50 per cent for personal use, you can only claim 50 per cent of the value.
- There’s no limit to how many assets you can purchase, as long as each asset costs less than $150,000.
Find out more about recent changes to the instant asset write-off. If you’re considering purchasing an asset, you’ll need to come up with the funds to make the purchase. In this situation, a short-term business loan can help you unlock the full potential of this tax break.