The instant asset write-off is a temporary tax deduction scheme available for all businesses with an annual turnover of less than $5 billion. The scheme has recently been extended to cover the 2022/23 tax year.
Eligible businesses can now claim an immediate tax deduction for the full cost of qualifying assets installed or in use by June 30, 2023.
Under the scheme, businesses can claim an immediate deduction for the full cost of an asset up to $150,000. For small businesses with an aggregated annual turnover of less than $500 million, the scheme includes both new and second-hand assets. As long as each purchase is under the threshold, there are no limits on the number of assets that can be claimed
What The Instant Asset Write-Off Means for Your Business
When you purchase an asset to be used by your business, the value of the depreciable asset can be included as a deduction on your tax return. This usually involves general depreciation rules that set the amount that can be claimed per year based on the estimated lifespan of the asset.
The instant asset write-off accelerates the speed of this process. Business owners can now claim a tax deduction for the full cost of the depreciable asset. in the same income tax year as the purchase of the asset.
The $150,000 threshold for the scheme is calculated on a per asset basis. As a result, businesses can purchase multiple assets under the threshold and write-off the total expense on their yearly tax return.
Example of How the Instant Asset Write-Off Works
Here’s an example of how the instant asset write-off can be used to reduce taxable income and free up capital for business investment.
A small business has a turnover of $1,200,000 and a net taxable income of $240,000. With a company structure and a turnover of less than $50 million, the company pays the current Australian company tax rate of 25%.
The total tax payable is $60,000 (0.25 x $240,000).
Under the instant asset write-off scheme, the company purchases $75,000 of eligible assets during the financial year. The total value of the assets is deducted from the net taxable income to reduce the sum to $165,000.
As a result of the instant asset write-off scheme, the total tax payable is reduced to $(41,250 (0.25 x $165,000).
Claiming deductions under the scheme, the tax saving would be $18,750 ($60,000 less $41,250).
With the savings included, the real cost to the company of purchasing the assets is $56,250 ($75,000 less the $18,750 tax saving).
Assets Must Be Installed or in Use by the Deadline
Assets eligible for the instant asset write-off scheme must be in use or installed and ready for use before the deadline of June 30, 2023.
For example, if an asset is purchased before the June 30, 2023 deadline but won’t be operational until August 2023, it doesn’t qualify for the instant asset write-off scheme.
Exclusions From the Scheme
The scheme covers all new assets that qualify under the existing depreciable asset criteria. Some types of assets do not qualify and are excluded from the scheme, including:
- Capital works
- Horticultural plants
- Intangible assets
For more information on excluded assets, visit the Australian Taxation Office website or consult your tax advisor.
Can Assets Purchased Under the Scheme Be Sold at a Later Date?
If you sell an asset purchased using the instant asset write-off scheme, you must include the amount you received in your net taxable income for the financial year.
Any insurance payment or other reimbursement must be included in your net taxable income for assets purchased under the scheme that are later stolen or destroyed.
Business and Personal Use Assets
You will only be able to claim the write-off for the percentage of the asset that is business use. For example, if you purchase new equipment for your business and use the asset for personal tasks 20% of the time, you can only write-off 80% of the asset cost under the scheme.
New Asset: $20,000
Business Use: 80% = $16,000
Personal Use: 20% = $4,000
Total Amount Eligible Under the Instant Asset Write-Off = $16,000
For an asset to qualify for the scheme, the total cost of the asset (including the personal use percentage) needs to remain less than the $150,000 threshold.
Assets That Exceed the Threshold
The $150,000 threshold works on a per asset basis. As long as the cost of each asset is less than the threshold, there is no limit to the number of assets that can be deducted under the scheme. It’s important to note that the entire cost of the asset must be less than the threshold to be eligible, excluding any trade-in value from existing business assets.
If the cost of the asset exceeds the threshold, you will need to use general depreciation rules.
For businesses using the simplified depreciation rules, any asset purchased with a total cost above the threshold must be placed into the small business pool for the financial year. Certain asset types may qualify for accelerated depreciation.
For businesses that don’t use the simplified depreciation rules, you may be able to use backing business investment to accelerate depreciation for some qualifying assets.
Which Assets Should I Consider Purchasing?
Before making any significant purchases, it’s important to determine how the asset will impact your business. Your decision to take advantage of the scheme should be based on your current needs and the planned growth of your business.
For example, you may have a plan to expand your manufacturing capabilities with new equipment as part of your long -term business plan. In that case, the instant asset write-off scheme provides an opportunity to reduce the cost involved in the expansion.
You should purchase assets that will help you achieve your business goals, not just to get a tax deduction. The instant asset write-off scheme is an incentive to invest in your business and reduce your taxable income, but the impact on your short term finances and cash flow should not be overlooked.