$20,000 for small businesses!
Find out if you qualify and whether you really need it? Anand Shukla
Are you a small business owner whose business’s annual turnover is less than $2 million? If the answer is yes then keep reading because this is big news for you and even if you’re not a small business owner, keep reading because I’m sure you know someone who is and probably you may be one of those aspiring ones looking to be entrepreneurs in the future like we all are.
The Australian Government has just announced a new measure for small businesses in the 2015 Budget that will allow small business to get instant write-off for any asset (new or second hand) that they buy that costs less than $20,000 acquired on or after 12th May 2015. However this immediate deduction will only last up until 30th June 2017. The existing threshold before the 12th of May 2015 was $1000,it is a big step to increase this threshold to $20,000.
Before I proceed, like I mention in every article of mine, here is a small disclaimer. Every content that is part of this article is general in nature. This article dwells on the content received from the budget for the FY 2015 and at the time of writing this, it was not the law but just a budget announcement. It may just be a matter of time before the ATO officially brings it into legislation and hence the content while being general in nature may be subject to a different interpretation by the ATO when the law actually receives royal accent. Hence, it would be highly advisable to consult the concerned advisors or government departments and get specific legal advise and not rely on the information provided in this article.
Under the new measure, all small businesses may be eligible for immediate write-off on each and every depreciating asset with a cost of below $20,000 in the income year in which the asset is first used or installed ready for a taxable purpose. This may also imply that if you buy something just before the 30th of June 2015, you may be eligible to claim it in the current financial year itself, reducing your tax liability by that amount. Majority of the capital assets will be able to be included in this immediate deduction. A small number of assets will not be eligible which I have listed later on in this article.
The new measure will replace the previous threshold of $1000 and increase the threshold to $20,000. This means that if the pool value is below $20,000, this can also be immediately written-off over this period. For assets that cost more than $20,000, the small business simplified depreciation pool will still be used and the asset will be depreciated at 15% in the first income year and 30% each income year after.
The lock out laws which prevented small businesses from re-entering the simplified depreciation regime for 5 years if they opted out has been reviewed for this measure and hence businesses may qualify to claim depreciation under the new $20,000 measure. This means “that law” (where some businesses were locked out of the simplified depreciation rules) has now been suspended! If you’ve previously opted out of the simplified depreciation then you will now be able to elect to use the new process immediately. This is simply great news for businesses and creates an even ground for all small businesses.
Just as this $20,000 announcement was made, I started receiving calls from existing business owners enquiring about this new regime. I wish to tell you that, investing your money only to get the tax benefit may not be a wise investment. Remember, you need to spend first to get a portion of it back, so if you do not need the investment, then you may end up stifling your cash-flow which may not be good for your business. There are numerous spending options always available. Be it business or personal, choosing wisely and investing money in the right place gets the desired results.
To give you an example, if I give to you a gift of $20,000, subject to you investing $200,000 in a property which is in the middle of the desert. (with water shortages, not adequate infrastructure, no internet connectivity and other bottlenecks), would you invest your $200,000 in such a property just because I am giving you a non-refundable gift of $20,000 free of cost? Probably not. You may rather wish to invest the $200,000 elsewhere where the rewards would be much bigger over time and not worry about the $20,000 I am giving you right now.
Similarly, $20,000 depreciation within a company structure would end up in a potential tax benefit of 30% in this year (pre June 30 2015) and potentially 28.5% the following year (post June 30 2015), which means the tax benefit you could receive is $6000 at a rate of 30%. Hence, while the benefit is great for businesses, due diligence and caution may be required before the investment is made. Simply put, if you do not need the investment, you should not invest just because there is a tax benefit.
With regards to eligibility of assets, some assets are exempt from the new measure. Horticultural plants, Capital Works, primary production assets where normal depreciation rules have been previously chosen to be used, assets leased out to another party on a depreciating asset lease and a few others.
As mentioned earlier, I wish to again make a note that these are only proposed changes and have not been implemented with the tax office’s legal framework as yet. These were announced in the budget speech by the treasurer and hence it would be suitable to make enquiries with the ATO before any investment decision is being made.
There were many other noteworthy announcements which I shall discuss in my forthcoming articles. In the meanwhile, the end of financial year is just round the corner and it is time to plan for your taxes. I wish to thank my readers for the feedbacks I receive for my articles and wish you financial sucesses for the upcoming financial year.
(This article is accompanied by a disclaimer, to avail a full copy of this, please contact A One Accountants by calling 03-86091889 and emailing us at info@a1accountants.com.au)