The instant asset write-off is a temporary tax deduction scheme available for all businesses with an annual turnover of less than $5 billion.
It allows eligible businesses to claim an immediate tax deduction for the full cost of qualifying asset that are installed or in use by June 30, 2022.
Under the scheme, businesses can claim for the full cost of an asset up to $150,000. For small businesses, 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, allowing business owners to claim a tax deduction for the full cost of the depreciable asset. Businesses can now claim a full deduction 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. Businesses can purchase multiple assets under the threshold and write-off the total expense on their yearly tax return.
Example of How 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 $750,000 and a net taxable income of $200,000. With a company structure and a turnover of less than $25 million, the company pays the current Australian company tax rate of 27.5%.
The total tax payable is $55,000 (0.275 x $200,000).
Under the instant asset write-off scheme, the company purchases $75,000 of assets during the financial year. The total value of the assets is deducted from the net taxable income to reduce the sum to $125,000.
As a result of the instant asset write-off scheme, the total tax payable is reduced to $34,375 (0.275 x $125,000).
Claiming deductions under the scheme, the tax saving would be $20,625 ($55,000 less $34,375).
With the saving included, the real cost to the company of purchasing the assets is $54,375 ($75,000 less the $20,625 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, 2022.
For example, if an asset is purchased before the deadline in March 2022 but won’t be operational until August 2022, 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 for the scheme, including:
For more information on excluded assets, visit the Australian Taxation Office website or speaking to your tax advisor.
Can Assets Purchased Under the Scheme Be Sold at a Later Date?
If you sell an asset that was purchased using the instant asset write-off scheme, you will need to include the amount you received in your net taxable income for the financial year.
For assets purchased under the scheme that are later stolen or destroyed, any insurance payment or other reimbursement must be included in your net taxable income.
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 than 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, if you plan to expand your manufacturing capabilities with new equipment as part of your long term business plan, 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 to achieve your business goals, not just to get a tax deduction. The instant asset write-off scheme is a compelling 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.
ScotPac Business Finance
Cash flow gaps are one of the most common causes for the failure of a business. When you purchase a new asset for your business, it’s important to determine how you will maintain working capital.
We offer a number of business finance solutions to help you take advantage of the instant asset write-off scheme without restricting your cash flow. You can use asset finance to access a line of credit to purchase new equipment and machinery or use invoice finance to unlock the cash tied up in your debtors ledger.
While traditional lenders have become more and more risk-averse, we find a way to say yes. We specialise in helping businesses grow and take advantage of new opportunities with flexible finance solutions tailored to the needs of your business.