What’s next for the $20k write off

The small business $20,000 depreciating asset write-off was announced as part of the 2016 Federal Budget and was passed by the Senate in June 2015.

Now that many small business owners are turning their minds to their 2015 Income Tax Returns what does this mean for you?

As you may be aware, small business entities with an aggregated turnover of less than $2 million may be eligible for an immediate write-off of depreciating assets that cost up to $20,000. This increased threshold applies for assets that are first acquired on or after 7:30 pm on 12 May 2015 and first used or installed ready for use on or before 30 June 2017.

Seems simple enough? The immediate deduction of up to $20,000 is allowed under the capital allowance rules for small business entities. To claim the deduction you may need to change the way you depreciate your existing assets.

Under the capital allowance rules for small business, entities eligible depreciating assets that don’t qualify for the entire cost to be deducted in the year they are purchased are put into a general small business pool. In the general small business pool, assets are depreciated at 15 per cent in the year they are allocated to the pool and 30 per cent in subsequent income years. If the closing balance of the general small business pool is less than $20,000 at year end, for years ending on or between 12 May 2015 and 30 June 2017, the balance can be written off. The threshold is normally $1,000 rather than $20,000.

If you haven’t been using the capital allowance rules for small business entities, but choose to do so, you will need to start depreciating your existing eligible assets in a general small business pool. Assets that are included in the pool can’t be taken out even if you opt out of the capital allowance rules for small business entities or are no longer considered to be a small business entity.

For depreciating assets that aren’t eligible for the $20,000 write-off the capital allowance rules for small business entities may give you an unfavourable outcome. Assets may depreciate more slowly in the general small business pool resulting in a lower depreciation deduction. Additionally, many small business owners like to simplify their tax compliance by keeping their tax and accounting depreciation rates the same; the capital allowance rules for small business entities will generally result in your tax and accounting depreciation being different.

It is important to note that the writeoff is designed to improve cash flow. If you have sufficient profit, the write off will bring forward the deduction in your Income Tax Return rather than spreading it over the effective life of the asset. The increased threshold will not result in an increased tax saving over the life of the asset. Accordingly, careful consideration should still be given to whether you should buy a particular business asset even if it is eligible for the write-off.

Still interested? The $20,000 writeoff can potentially be used for purchases of new assets, secondhand assets or improvements to existing assets. There are some complexities involved in respect of how cost is determined, purchasing assets from related parties and when an asset is first acquired. We would be happy to assist you with whether your asset purchases qualify for the write- off and ensuring you comply with the relevant capital allowance rules.

For more information on how we can help you succeed contact us one of our advisors.

Philip MacIsaac
Director - Taxation
+61 3 9608 0157