One of the best tax breaks for many businesses is the instant asset write-off, which offers a means to acquire capital assets and obtain an immediate tax deduction.
Whats the Instant Asset Write-Off COVID-19 change?
As part of the Federal Governments Coronavirus Stimulus Package, the Instant Asset Write-Off threshold increased from $30,000 to $150,000 (net of GST) per asset acquired.
This change applies to businesses with an aggregated annual turnover of less than $500 million, where those assets are:
- first used or installed ready for use between 12 March 2020 and 30 June 2021, and
- purchased by 31 December 2020.
How does the Instant Asset Write-Off work?
The Instant Asset Write-Off works by eligible businesses claiming a deduction straight away for the portion of the cost of an asset that is attributable to business use.
The instant asset write-off eligibility criteria and threshold have changed over time. You need to check your businesss eligibility and apply the correct threshold amount depending on when the asset was purchased, first used or installed ready for use.
Can a small business claim an immediate write-off?
If you are a small business, you will need to apply the simplified depreciation rules in order to claim the instant asset write-off. It cannot be used for assets that are excluded from those rules.
Can a sole trader claim the Instant Asset Write-Off?
Yes, sole traders are eligible.
READ: Sole trader tax: What you need to know
Whats the Instant Asset Write-Off extension?
The Instant Asset Write-Off has been extended with a measure dubbed temporary full expensing. It covers the period from 7.30pm AEDT on 6 October 2020 until 30 June 2023 (including the extension announced in the 202122 Federal Budget).
Temporary full expensing now allows an immediate deduction for purchases of new eligible depreciating assets (for businesses with an aggregated turnover under $5 billion), eligible second-hand assets (for businesses with aggregated turnover under $50 million), and the balance of a small business pool at the end of each income year in the period (for businesses with an aggregated turnover under $10 million).
You can find all the details relating to recent changes to the Instant Asset Write-Off on the ATO website.
Get organised for tax time this year with our FREE EOFY Calendar. Click here to get started.
Examples of tax-deductible items
Some of the items that you could consider purchasing before 30 June 2021 include:
- Cash registers and other POS devices
- Cars, vans and utes
- Fittings and fixtures
- Plant and machinery
- Computers and laptops
- Security systems
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Key points about the Instant Asset Write-Off
Here are nine key tips for making sure youre compliant with the tax rules.
1. Be in business
Its a basic point, but one that people sometimes forget: you actually have to be in business to claim the Instant Asset Write-Off. Having an ABN is not enough.
2. Second-hand assets qualify
Assets that you purchase dont have to be brand new. Both new and second-hand assets qualify.
3. Deduction, not a hand-out
This tax break is not a cash hand-out, but a deduction that reduces your taxable profit.
If you operate as a company and spend, say, $40,000 on a capital purchase (net of GST), then assuming a tax rate of 26 percent, the company will receive a 26 percent deduction, which equates to a $10,400 reduction in tax.
This means that the company will still have a net cash outlay of $29,600 on this purchase.
The immediate deduction limit is worked out on a GST-exclusive basis. This means that if your business is registered for GST and claims an input tax credit on the purchase, the tax deduction is worked out net of GST.
READ: GST Reimbursements And Credits: The Complete Guide
5. Claim for more than one asset
Your business may purchase and claim a deduction for each asset that costs less than the relevant threshold.
For example, on 16 April 2021 your business purchases a piece of machinery costing $50,000 (net of GST) and then prior to 30 June 2021 purchases a new car costing $40,000 (net of GST). The business can claim both of these as each of the assets as an immediate tax deduction in the 2020/21 year as both assets cost under the relevant threshold.
6. Used or installed and ready to use by EOFY
The asset must be used, or installed ready for use by the end of the financial year. This is particularly important if the business purchases the asset just before the end of 30 June.
For example, if the asset is purchased say on 29 June 2021, but not available for use in the business until 7 July 2021, then the business loses the entitlement to claim an immediate tax deduction for the asset in the 2020/21 year. Instead the business can claim ordinary rates of depreciation on the asset in the 2021/22 year and following years, which may include the 50% accelerated depreciation rate announced as part of the Governments COVID-19 stimulus package.
7. Apportion private use
Dont forget to pro-rate the deduction for private use to claim the full deduction, the asset has to be used solely for business purposes. If you operate as a sole trader or in a partnership and there has been some personal use of the asset, the deduction needs to be pro-rated to reflect this.
8. FBT and family trusts
The deduction is not pro-rated where you operate as a company or a family trust, but fringe benefits tax (FBT) may apply to the private use of the asset by employees (FBT on company cars is a common example).
9. Car limit
Theres a limit applied to the cost of vehicles designed to carry a load less than one tonne and fewer than nine passengers. Its:
- $59,136 for the 202021 income year and
- $60,733 for the 202122 income year
Find more information about the car limit on the ATO website.
This article, while written by accredited tax agent and chartered accountant Joe Kaleb of the small business portal Australianbiz, does not constitute financial advice. For advice on your specific situation, MYOB recommends engaging a qualified professional directly. You can begin searching for an advisor here.