Understanding the $20,000 Small Business Instant Asset Write-Off

instant-asset-tax-write-off

Image courtesy www.ato.gov.au

The May Federal Budget included a popular item for small businesses, which allowed them to instantly write-off a purchased asset worth up to $20,000.  This announcement instantly threw up many questions as to how and when this rule could be applied.

I will try to answer some useful questions in relation to this announcement:

In accounting terms, what does it mean to ‘write an asset off’?

Usually when business assets are purchased, they must be ‘depreciated’, ‘expensed’ or ‘written down’ over a number of years.  Each year this amount of depreciation can be claimed as a tax deduction.  The ATO does not ordinarily allow businesses to claim 100% of the cost of large assets in one year.  When this is allowed it is referred to as the asset being ‘written off’.  By allowing a business owner to write off up to $20,000 of an asset in one year is essentially bringing forward tax deductions that would otherwise be claimed in future years.

Who qualifies as a small business?

A small business is one that has an annual aggregated turnover of less than $2m per year.  It also includes sole traders and partnerships.

What if my business grows above $2m turnover?

The rule applies to the financial year the asset was purchased.  If a business grows above $2m turnover in subsequent years this will not affect what was claimed or written-off in previous years.

Does the threshold include GST?

This depends on whether the business is registered for GST or not.  If the business is registered, the threshold is $20,000 ex-GST, meaning you can claim up to $22,000 when GST is added.  If the business is not registered for GST, then the threshold is $20,000 including GST.

When does the ruling apply?

For assets to fall under the ruling, they must have been purchased between 7.30pm on 12th May 2015 and 30 June 2017.

How are assets that exceed $20,000 treated?

The ruling applies to individual assets purchased up to the value of $20,000.  Assets $20,000 or above will need to be depreciated in their normal fashion.

What about an asset purchased with a trade-in, such as a vehicle?

Only the cost of the asset has a bearing on the threshold – not the value of the net trade in.  For example, if you purchased a new vehicle for $50,000 and traded your old one in for $35,000 the write-off would not apply as the cost of the new vehicle is $50,000.

 

We are not accountants but understand where these rules fit in to a small business.  While tax deductions are nice, our belief is that these decisions should be made with the business’ broader goals and objectives in mind.

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