What is and how does instant asset write off work for small businesses?

4 min read

You may have heard of the instant asset write off scheme (IAWO), but you might not know exactly what is the instant asset write off for small businesses and how it actually works. 

What’s the purpose of this instant asset write off scheme? As it has been over the last few years, the aim of this scheme is to get cash flowing into the economy and businesses spending while also incentivising the growth of that business.

Now that we live in a post COVID-19 world, the scheme has been expanded in scope and become even more important to aid the recovery of individual businesses like yours, and the economy at large.

“The instant asset write off also helps to improve cash flow for businesses by bringing forward tax deductions for eligible expenditure,” Josh Frydenberg, Australian federal government Treasurer.

Instant asset write off for small businesses

The instant asset write off for small business is a handy tax saving scheme available for all Australian small businesses. 

Basically, if you’ve bought a core piece of depreciating equipment or other work-related business assets, you can save on your tax bill with a nice offset by making an immediate tax deduction.

The idea behind the scheme is to encourage spending and business growth by incentivising the purchase and installation of work-related equipment for eligible businesses.

How does instant asset write off work?

The instant asset write off scheme works by allowing you to immediately write off the value of a business-related piece of equipment or asset. 

  • For small businesses with annual turnover between $50 million and $500 million, they can now claim a full deduction for new and second-hand assets valued up to $150,000.

You must be able to prove that the piece of equipment is central to your business and its operation. This is crucial.

Depending on your business, eligible assets for the instant asset write off can include:

  • vans, trucks, and vehicles
  • tools and trade equipment
  • computers and IT equipment
  • plant machinery
  • coffee machine and kitchen equipment

Many assets don’t qualify for the scheme, and you’ll need to be sure of your purchase before you proceed down this avenue.

From the ATO:

  • The asset may be either new or second hand.
  • It must be directly linked to your business function.
  • You may claim a portion for personal and for business. So, if you use a delivery van for 30% work use and 70% personal use, you can dice it up and claim that 30% portion.
  • You may not stockpile. You must have the equipment installed and in use for business purposes by the end of financial year.
  • You must be an operational business, not a holding for investment purposes.

How to calculate and how much is instant asset write off?

Fresh changes to the scheme were announced in the 2020 federal budget, so you may not be aware of its current state. The scheme was also extended in the 2021 federal budget.

The instant asset write off has been boosted yet again in the form of ‘temporary full expensing’, which is intended to increase both cash flow and small business investment.

  • Until 30 June 2023, businesses with a turnover of up to $5 billion will be able to deduct the full cost of an eligible asset in the first year it’s used or installed.
  • SMEs turning over up to $50 million can now apply ‘full expensing’ to all second-hand assets.
  • Businesses turning over between $50 million and $500 million can now claim a full deduction for second-hand assets of up to $150,000 in value.

Who can access the instant asset write off?

Any Australian small business that purchased business related equipment, and complies with the above specifications for eligibility, can utilise the instant asset write off scheme.

Just because you can doesn’t mean you should. Will your business actually benefit from instant asset write off? Perhaps not.

First and foremost, you need to make sure that the purchase will help grow your business.

If your business is in a tenuous position, or the future of your cashflow is in doubt, reconsider your need to purchase assets.

There are several ways in which this tax offset would be of no benefit:

  • You’re operating at a loss.
  • You don’t really need the equipment as a core part of your operations.
  • You don’t have the capital to buy the equipment before any tax benefit kicks in.
  • The equipment doesn’t directly contribute to cashflow.

Ruminate seriously about whether you actually need anything. Many businesses don’t. This isn’t a free ticket after all, as you’ll have to stump the initial costs and benefit from the write off later.

You must also make sure your purchase is covered before you proceed. If unsure, speak to an advisor.

How to apply and record instant asset write off?

When approaching the topic of how to apply and record the instant asset write off, get your advisor involved. 

Accountants and finance experts excel in this area, and they should be your first port of call before you lay down cash with a view to take advantaging of the scheme.

How to calculate the IAWO scheme from the ATO:

  • The whole price of the equipment or asset must be under the threshold ($150,000 for most small businesses).
  • The threshold will be calculated as either inclusive or exclusive of GST, depending on whether your business is registered for GST or not.
  • To calculate the amount you’re eligible to claim, be sure you first subtract the portion of the equipment you use for private or personal use. 
  • The remaining balance used for business is your taxable portion. 
  • Regardless of how much you use for private use and how much the taxable portion is, the entire cost of the asset must still be under the threshold. 

Understanding what is and how does the instant asset write off work for small businesses is best understood in conjunction with your advisor. Failing that, be sure to consult the ATO here to come to a full understanding of the instant asset write off scheme. 

You’ll always be ready for tax time with Reckon One!

Take control of your finances in the new financial year.