The small business instant asset write-off announced in last year’s Federal Budget has proved very popular with business owners. To assist owners to better understand this new measure, we’ve produced some frequently asked questions and accompanying answers.
Introduction
A small business is entitled to claim an outright tax deduction for “depreciating assets” costing less than $20,000 acquired on or after 7.30pm (AEST) on 12 May 2015 and up to 30 June 2017. Note that to be able to claim the deduction this financial year, the asset needs to be both ordered and also used or installed ready for use by 30 June 2016.
Alternatively to claim the deduction in the 2016/17 year, the asset needs to be both ordered and also used or installed ready for use by 30 June 2017.
To claim the instant asset write-off, you need to apply the “pooling” system of depreciation in your business tax return. Under the pooling system, assets costing $20,000 or more are depreciated at a rate 15 per cent in the first year and 30 per cent each year thereafter.
What is a depreciating asset?
A depreciating asset is an asset used in a business that has a limited effective life and is expected to decline in value over the period you use it. Vehicles, office furniture and equipment are depreciating assets. Land, in-house computer software, items of trading stock and certain intangible assets (e.g. goodwill) are not depreciating assets.
What is a small business?
In order to be a small business, the turnover of the business, including connected entities and affiliates, has to be less than $2 million GST exclusive per annum. The turnover for either the current financial year or the previous financial year can be used.
Is the cost GST-inclusive or exclusive?
If your business is GST-registered, the write-off threshold is the GST exclusive cost of the asset. Therefore, the threshold on a taxable asset is $22,000 (including GST). By contrast, if your business is not GST registered, the threshold is GST-inclusive ($20,000 including GST). Whilst the threshold is frequently referred to as $20,000, the cost of the asset must be less than $20,000 to claim the write-off.
Is the $20,000 threshold applied on a per asset basis?
Yes, the threshold is applied on an asset-by-asset basis. Even where the assets purchased are identical or form part of a set, each is entitled to its own $20,000 threshold. You should ensure that invoices separately itemise each asset that you purchase or at least the quantity of assets where they are identical.
EXAMPLE
ABC Pty Ltd owns a cafe & is in need of some new furniture. The company acquires 150 identical chairs at $200 each, totalling $30,000 (GST-exclusive). Despite the assets being identical, the company can write-off the entire $30,000 provided all other criteria are met. The company should ensure that the number of chairs purchased is indicated on the invoice.
How is the write-off applied where an asset is not used wholly for business purposes?
This is only applicable for sole traders and partnerships.
Eligibility for the instant asset write-off is based on the cost of the asset, but the extent of the claim is based on the proportion of business use.
EXAMPLE
Stephen is a sole trader landscaper and purchases a ute for $26,000. The ute is used 60% for business:
Stephen’s Cost = $26,000
Stephen’s business use proportion = $15,600 ($26,000 x 60%)
The ute is not eligible for write-off as the cost is not less than $20,000, even though the proportion of business use is below this amount.
What is the impact of a trade-in?
Because the $20,000 threshold is applied on the cost of the asset, the trade-in value is irrelevant. A trade-in simply reduces the net amount to be paid for the asset, not the cost of the asset.
EXAMPLE
XYZ Services Pty Ltd purchases a $30,000 business vehicle, which after a trade-in of $15,000 only requires a further $15,000 payment. The vehicle is not eligible for the $20,000 write-off as the cost is $30,000, even though the net amount to be paid is less than the $20,000 threshold.
Are financed assets eligible?
Yes, depending on the type of finance. Assets that are the subject of a commercial loan, chattel mortgage or hire purchase would all qualify. Assets that are the subject of a lease do not qualify for the write-off due to the fact that the ownership of the asset under a lease remains with the finance company.
Do improvements made to assets qualify?
Improvements to assets are also eligible to be written-off with their own $20,000 threshold provided:
The improvement is the first addition to the asset since purchase;
The improvement is under $20,000; and
The asset itself was written-off in a previous financial year.
This is good news for businesses that make improvements to assets at a later time.
EXAMPLE
Joshua purchased a vehicle for $16,000 in 2015/2016 year and claimed the immediate asset write-off. In the following year 2016/2017, Joshua spent a further $5,000 on improvements to the vehicle. The additional spend on improvements is eligible to be written-off as it meets the above three conditions.
Can a director sell an asset to a company and claim the instant write-off?
Yes, provided the arrangement is not artificial or contrived. However, to be eligible, the asset will need to be acquired by a different legal entity.
EXAMPLE
Matthew owns a 5 year old vehicle that he wishes to contribute to his trading company. If he was a sole trader, he couldn’t claim the immediate write-off in his business as the vehicle wasn’t “first acquired” after the start date of 7.30pm on 12 May 2015. However, if Matthew sold the vehicle to a company that he controlled, the “first acquired” criterion could be met (provided the sale was at market value) as the company is a different legal entity.
What if a business grows & is no longer a small business?
If a business ceases to be a small business, (e.g. its turnover exceeds $2 million) in a subsequent financial year, it doesn’t impact on what was claimed in prior financial years.
Disclaimer
This information is provided as a guide only and is not intended to constitute advice whether legal or professional. You should obtain appropriate advice concerning your particular circumstances.
