The best tax breaks for small business is the instant asset write-off, a great way for your business to purchase capital assets and get an immediate tax deduction.
As part of the COVID-19 Coronavirus Stimulus Package, the instant asset write off threshold has increased from $30,000 to $150,000 (net of GST) per asset acquired.
This measure applies to all purchases from 12 March 2020 to 30 June 2020 where the assets are used or installed ready for use, in the business by 30 June 2020.
Examples of tax-deductible items
Some of the items that you could look at purchasing before 30 June 2020 include:
- Cash registers, Coffee Machine, Fridges, Cool Room, etc
- Cars, vans, utes, trucks, earthmoving equipment
- Fittings and fixtures
- Plant and machinery
- Computers, laptops, multi-function scanners, etc
- Security systems
- You have to be in business to claim the instant asset write-off – having an ABN is not enough.
- Both new and second-hand assets qualify.
- The $150,000 limit is worked out on a GST exclusive basis. This means that if your business is registered for GST and claims an input tax credit on the purchase, the tax deduction is worked out the net of GST.
- Your business may purchase and claim a deduction for each asset that costs less than the $150,000 threshold. For example, on 16 April 2020 your business purchased a piece of machinery costing $70,000 (net of GST) and then prior to 30 June 2020 purchases a new car costing $50,000 (net of GST). The business can claim both of these as each of the assets as an immediate tax deduction in the 2019/20 year as both assets cost under the $150,000 threshold.
- The tax break is not a cash hand-out but a deduction that reduces your taxable income. So if you operate as a company and spend say $60,000 on a capital purchase (net of GST), then assuming a tax rate of 27.5%, the business will receive a 27.5% deduction which equates to a $16,500 reduction in tax. This means that the business will still have a net cash outlay of $43,500 on this purchase.
- The asset must be used or installed ready for use by 30 June 2020. This is particularly important if the business purchases the asset just before the end of the financial year. For example, if the asset is purchased say on 27th June 2020, but not available for use in the business until 2nd July 2020, then the business loses the entitlement to claim an immediate tax deduction for the asset in the 2019/20 year. Instead, the business can claim ordinary rates of depreciation on the asset in the 2020/21 year and following years.
- The immediate deduction for a car cannot exceed $57,581 – being the car cost limit for the 2019/20 year.
- Don’t forget to pro-rate the deduction for private use – to claim the full deduction, the asset has to be used solely for business purposes. If you operate as a sole trader or in a partnership and there has been some personal use of the asset, the deduction needs to be pro-rated to reflect this. The deduction is not pro-rated where you operate as a company or a family trust, but fringe benefits tax (FBT) may apply to the private use of the asset by employees (FBT on company cars is a common example).
The purchase of strategic equipment could improve your profitability in the longer term, while also providing great tax deductions in the short-term. If you would like and further information, please feel free to contact our office.