New rules expand instant asset write-off concessions for small businesses

New rules will allow more businesses to access the small business instant asset write-off concession, with the threshold temporarily increased to $150,000.

In response to the COVID-19 pandemic, the federal government has increased the instant asset write-off threshold to $150,000 from $30,000 between March 12, 2020 to December 31, 2020.

The eligibility for the concession has also been expanded to include businesses with an aggregated turnover of less than $500 million, up from $50 million.

Eligible businesses can use the instant asset write-off concession to immediately write off the cost of each business asset that is below the threshold.

This means businesses can claim a full tax deduction for the asset’s purchase cost in the first year the asset is used or installed ready for use.

The concession applies to both new and second-hand assets that are first used or installed ready for use.

Using the new instant asset write-off rules

Here are the key points to using the updated instant asset write-off rules:

• If the business is registered for GST, the threshold of $150,000 is GST exclusive.
• You can only claim an immediate deduction for the business portion of the asset (i.e. excluding private usage portion). While you can only claim the business portion as a tax deduction, the entire cost of the asset must still be less than the relevant threshold.
• It is not sufficient to have purchased the asset during the temporary uplift period – the asset must be in use or installed and ready for use during the period to be able to claim the instant asset write off.
• Certain assets are excluded from the instant asset write-off rules, including:
  • Assets that are leased out for more than 50 per cent of the time on a depreciating asset lease
  • Assets allocated to a low-value assets pool
  • Capital works deductions.
• If you purchase a car (e.g. passenger vehicles designed to carry a load less than one tonne and fewer than nine passengers, except a motor cycle or similar vehicle), the instant asset write-off is limited to the car cost limit of $57,581 (GST inclusive) for the 2019-20 income tax year.
• Costs incurred to improve an existing asset that has previously been written off under the instant asset write-off rules can also be immediately written off.
• From January 1, 2020, the instant asset write-off will only be available for small businesses with an aggregated turnover of less than $10 million and the threshold will be $1,000.

How do the new instant asset write-off rules work?

The new rules for the small business instant asset write-off concession are complex, so here is an everyday example to help you understand the changes:

Izzy Capstone Pty Ltd is in the business of manufacturing furniture and requires a new assembling machine to help increase the output capacity of their production line. Izzy Capstone Pty Ltd purchased the assembling machine for $100,000 (GST exclusive), which was paid for on February 25, 2020.

Under the terms of the purchase, the machine was delivered to the business’ premises for installation and was ready for use on April 1, 2020. As the new machine was ready for use between March 12, 2020 to December 31, 2020, when the instant asset write-off threshold increased to $150,000, Izzy Capstone Pty Ltd can claim the entire cost of the machine in their 2019-20 tax return as a tax deduction.

If the machine had been delivered and installed for use prior to 12 March 2020, Izzy Capstone Pty Ltd would not have been able to immediately write-off the machine as the instant asset write off threshold would have been $30,000.

Other instant asset write-off considerations

While the prospect of a significant tax deduction is appealing for small businesses, it is also important to consider the cash flow impacts that result from committing to such a decision.

With the Australian economy likely to experience a period of recession, small businesses need to assess whether the economic benefit of investing in new assets to drive business activity outweighs the immediate benefit of retaining cash to finance daily business working capital needs.

Alternative options such as entering longer term financing arrangements to purchase business assets may be a valid strategy considering these competing priorities.

Talk to the tax experts

If you have questions about the instant asset write-off changes or need help assessing your business’ circumstances, speak to one of our business advisors today.

The trusted team at LDB takes pride in our ability to listen, understand your needs, and bring together the necessary expertise to give you the right advice.

To learn more, do not hesitate to speak with our team on (03) 9875 2900 or send us a message via the contact form below.