$20,000 Write-off’s for small businesses!
Find out what, why and how? By Anand Shukla
Recently there has been a lot of buzz around the $20,000 write-off which small businesses with a turnover of below $2m a year may be eligible to claim. However through, at the time of compiling this article these laws were only announced and had not received royal accent. I started getting numerous calls from clients seeking answers to some questions pertaining the benefits announced and hence I have compiled some FAQ’s below. Kindly note they may be subject to interpretational differences by the ATO.
On the face of it, the benefits offered to small businesses are creditworthy and the government has undoubtedly impressed many small businesses with the incentives on offer. In my opinion this will not only stimulate the economy but also create a wave of belief for the current government for the many small business owners in Australia who the government believes to be the engine room of Australian economy. As per statistics, small businesses employ about 4.5 million people and generate an aggregate output of $330 billion each year. Our government seems committed to delivering growth through initiatives such as these and the $20,000 write off is one such example.
In a nutshell, there were many incentives offered to small businesses, including the proposed reduction of the company tax rates to 28.5% and incentives for hiring new employees amongst many others; however though this article only focuses on the much hyped $20,000 Write-off for business assets.
Frequently asked Questions (FAQ’s):
Who is eligible?
All small business with an annual turnover of less than $2 million and meets the definition of small business entity may be eligible for the immediate deduction for assets which cost less than $20,000.
What is the current law?
Previously, small businesses had the option of using the ‘simplified depreciation rules’ which allowed small business to immediately deduct any assets that costed less than $1,000. Assets that costs more than $1,000 were able to be pooled together and depreciated at a rate of 15% in the first income year and 30% of the cost being deductible for each year thereafter.
What is changing?
From 7:30pm on the 12th of May 2015 up until 30 June 2017, threshold will increase from $1,000 to $20,000. This means that low pool value threshold will also increase to $20,000.
What does this mean?
Under the new measure, all small businesses may be eligible for immediate deduction on each and every depreciating asset with a cost below the threshold of $20,000 in the income year in which the asset is first used or installed ready for a taxable purpose.
This will also mean that if the pool value is below $20,000, this can also be immediately deducted over this period. For assets that cost more than $20,000, the small business simplified depreciation pool will be used and deducted at the rate of 15% in the first year.
How will the change be monitored?
Even though the threshold has changed, the rules around asset eligibility have not. Therefore any asset that was eligible to be immediately deducted under the previous $1000 threshold shall be eligible.
Does the $20,000 include GST?
This was not made clear by the government but my opinion is that it should be excluding GST since the businesses would be eligible to claim an input tax credit for the GST, leaving the rest to be written off. However though an entity that is not registered for GST cannot claim an input tax credit and hence for such entities the $20,000 would be inclusive of GST.
Are all assets eligible?
All assets both new and second hand will be eligible except for a few assets such as horticultural plants, capital works (construction/renovations), Softwares, Primary production assets where the entity has chosen to use the normal depreciation rules and also assets leased out to another party on a depreciating asset lease.
While there is no doubt that the new write-off rules are really great from a tax point of view but as business owners, we also always have to keep in mind our cash flow situation. A $19,999 asset spend could equate to a 28.5% tax rebate in the following year within a company structure to give you a tax benefit of $5700; but to get a portion back you need to spend the lot. Also too, you would not have anything to claim in the following year since you would need to spend again to get another portion back. Hence instead of a write-off I would just call it an accelerated depreciation, where you are effectively bringing the claims ahead a few years which you would otherwise do it over a period of time. Hence it would be advisable to spend only if you need the asset, not just because there is a tax benefit.
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