Should your small business use the instant asset tax write off?
Written by Angela Bichler: Sydney West Business Services. Chartered Accountant and Reckon Accredited Partner.
The instant asset write-off is a primary component of this year’s federal budget and you could be forgiven for not knowing the new rules and spectrum of the scheme.
After all, the scheme has undergone several incarnations over the last two years, iteratively growing in scope while thresholds have lowered, allowing more businesses to take advantage.
Don’t be fooled though, this is no freebie and although it may seem attractive, there’s every chance you should not be taking advantage of it. Many businesses seem to want it, but not nearly as many actually use it.
In 2019 Reckon conducted a survey of over 1200 businesses who say that 39% of them had not used the write-off. Many of those likely don’t know what it is or what to do with it, since 91% said they would like to see it extended.
Are you in that group who want the scheme to remain but have never actually used it? Do you really need it? Let’s investigate.
What exactly is the instant asset write-off scheme?
Basically, if you have bought a core piece of depreciating equipment or another work-related asset, you can save on your tax bill with a nice offset.
The idea behind the scheme is to encourage spending and business growth by incentivising the purchase and installation of work-related equipment.
You must be able to prove that the piece of equipment is central to your business and its operation. This is crucial.
Eligible assets can include:
- Vans, trucks and vehicles
- Tools and trade equipment
- Computers and IT equipment
- Plant machinery
- Coffee machine and kitchen equipment
What are the new 2020 rules for the instant asset tax write-off?
Fresh changes to the scheme were announced in this year’s 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.
- From budget night until June 30, 2022, 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.
Do you really need it?
Will your business actually benefit from a tax offset? 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 does not directly contribute to cashflow.
Think really hard about whether you actually need anything. Many businesses don’t. This is not a free meal ticket after all, as you’ll have to stump the initial costs and benefit from the write off later.
Make sure your purchase is covered before you proceed
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 EOFY.
- You must be an operational business, not a holding for investment purposes.
Get your advisor involved
Before you head off and buy a new work van, have a chat to your advisor. 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 advantage of the scheme.
About the author
Our primary objective at Sydney West Business Services is to ensure our clients receive exceptional and reliable service from day one. We aim to build and maintain strong working relationships with our clients to help them succeed in all aspects of their business. Reach out to us if you’re thinking of starting a new business or you need assistance with getting your existing small business on track.
Reach out to us if you’re thinking of starting a new business or you need assistance with getting your existing small business on track.
Phone: 02 4571 1911