UPDATE – The Australian Government has announced a $17.6 billion economic plan in response to the challenges posed by the coronavirus, including increasing the instant asset write-off threshold. Click here for more information.
In good news for small and medium business owners, the federal government wasted no time in passing changes to the instant asset write-off scheme outlined in the 2019 Federal Budget.
The instant asset write-off threshold was increased from $25,000 to $30,000 and eligibility extended to businesses with annual revenues of less than $50 million.
This allows these business owners to immediately write off depreciable assets that cost their business less than $30,000. Business owners can therefore claim a deduction for an asset in the same income year as the asset was purchased.
In a tighter economic climate, these amendments provide small to medium business owners with the opportunity to invest in new essential items whilst minimising the impact on their cash flow. However, the rules are much more complicated and it’s important for business owners to understand how these changes will affect them and why they should seek guidance from a Quantity Surveyor and an Accountant before lodging their annual income tax return this year.
What is an eligible asset?
Small and medium business owners can use the instant asset write-off for any depreciable plant and equipment asset or fit-out installed in their business.
The pool of eligible deductible items is broad and ranges from office furniture, blinds, workstations and light fittings to more specific industry assets such as commercial ovens in restaurants, bedding and furniture in hotels, barber chairs and cutting and styling workstations in hair dressing salons and medical or manufacturing equipment.
However, the instant asset write-off applies only to certain depreciable assets. There are some assets that don’t qualify such as capital works (building construction costs) and assets leased to another party on a depreciating asset lease.
What do the changes mean for business owners and their Accountants?
As there have been a number of changes to the instant asset write-off rules in recent years, the amendments mean there will be three threshold tiers for businesses and their Accountants to consider for the 2018/2019 financial year:
- The first tier applies to depreciable assets valued less than $20,000 acquired before the 29th of January 2019
- The second tier applies to depreciable assets valued less than $25,000 first used or installed between the 29th of January 2019 and the 2nd of April 2019
- The third tier applies to depreciable assets valued less than $30,000 first used and installed after the 2nd of April 2019 Budget announcement and before 1 July 2020
The first two tiers will apply only to businesses with an aggregated annual turnover of less than $10 million, while the third tier is available to small to medium businesses with an aggregated annual turnover of less than $50 million.
The rules revolve around the aggregated annual turnover of the business, which may change from year to year, potentially impacting the deductions they are eligible for in future years. Businesses should always seek guidance from their Accountant when determining the correct thresholds to apply.
Assets that don’t qualify for the instant write-off can be depreciated using their effective life or, where eligible, by allocating to an accelerated low-value pool.
The decline in value of a depreciating asset is generally calculated using its effective life as set by the Commissioner of Taxation outlined in Tax Ruling (TR2018/4), which is determined by how long it can be used to produce income. This considers:
- Whether it’s subject to wear and tear at a reasonable rate
- Whether it’s maintained in reasonably good order and condition
- The period within which it is likely to be scrapped, sold for no more than scrap value or abandoned
The effective life is used to work out the asset’s decline in value (or depreciation) for which an income tax deduction can be claimed.
Small businesses can add assets with a cost equal to or more than the instant asset write-off threshold and receive a 15 per cent deduction in the year of purchase and installation ready for use and a 30 per cent deduction from the second year onwards. At the end of an income year where the balance of the pool at the time, before applying depreciation deductions, has a total depreciable value of less than the applicable threshold, the remaining un-deducted value of the pool can be claimed in full.
What happens when the new instant asset write-off rules end?
From the 1 July 2020, the threshold will revert back to $1,000 for small business entities only. Medium sized business will need to work out their asset’s decline in value under the ordinary depreciation provisions after 30 June 2020.
BMT Tax Depreciation are experts in small and medium business depreciation
Given the complexities around the instant asset write-off, it’s more important than ever to work with a specialist Quantity Surveyor like BMT Tax Depreciation to ensure all asset deductions are identified and claimed correctly under this new ruling.
Whether you’re purchasing a business which owns buildings and/or plant and equipment assets or you’re planning to purchase new plant assets and write-off existing ones, BMT can create a new depreciation schedule or update an existing one to ensure deductions are calculated correctly.