The instant asset write-off allows small businesses to claim an immediate deduction for new or second-hand plant and equipment asset purchases for the business portion of the cost of an asset in the year the asset is first used or installed ready for use. The accelerated depreciation enables a business to reduce its taxable income by deducting eligible purchases.
If you’re a small business, you will need to apply the simplified depreciation rules to claim the Instant Asset Write-Off. The measure cannot be used for assets that are excluded from those rules, and sole traders are also eligible to receive the accelerated depreciation.
As a consequence of the 2020 COVID-19 pandemic, the ATO has increased the maximum threshold from $30,000 to $150,000 per asset acquired. These provisions are available to all businesses with an aggregated turnover between $50 million and $500 million, which may be eligible to deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31 December 2021 and first used or installed by 30 June 2022.
The Instant Asset Write-Off provisions have now been extended with the additional measure of the Temporary Full Expensing (TFE) provision introduced for the 2021-22 and 2022/23 tax returns.
As a result of the COVID-19 lockdowns across Australia, the Commissioner of Taxation introduced the measure to encourage spending among businesses and to provide a much-needed tax benefit to SBE’s during the economically challenging period.
The measure works by enabling eligible businesses to claim an immediate deduction for purchases of new, eligible depreciating assets, eligible second-hand assets, and the balance of a small business pool at the end of each income year in the period.
Ultimately, the premise of the provision was designed to support businesses and encourages investment, as eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it’s first used or installed ready for use for a tax purpose.
BENEFITS OF THE INSTANT ASSET WRITE-OFF
The benefit of the Instant Asset Write-Off can be seen in the following example. Where a business operates as a company and spends, for example, $30,000 on capital expenses needed to ensure the business is operable. Where the company is a Base Rate entity the company tax rate will be 25%. The company will receive a deduction for the $30,000, which equates to a $7,500 reduction in tax. Thus, the company will still have a net cash outlay of $22,500 on this purchase.
Note that the purchase must be prorated to account for any private usage on the expense. However, to access the Temporary Full Expensing measure the asset purchased must be solely used for business purposes.
Before making any large purchases, we suggest you speak to your accountant or tax professional and assess how the asset will benefit your business and how the purchase may impact your cash flow or finances in the short term.
If you decide to take advantage of the instant asset write-off, you should make the decision based on the needs of your business. For example, if you need to purchase a vehicle for deliveries to expand your business operations to help you achieve your business goals, or because it is in line with your business plan.
If you’d like more information on how the Instant Asset Write-off can benefit you, contact us at any time and we’ll be happy to discuss it in more detail.