Utilising the $150,000 instant asset write-off
The instant asset write-off enables businesses to claim an upfront deduction for the full cost of depreciating assets in the year the asset was first used or installed ready for use for a taxable purpose.
The COVID-19 stimulus measures temporarily increased the threshold for the instant asset write-off between 12 March 2020 and 31 December 2020 from $30,000 to $150,000, and expanded the range of businesses that can access the threshold to those with an aggregated turnover of less than $500 million.
- your company’s turnover is under $500 million, and
- you purchase an eligible asset for $140,000 (GST-exclusive) on 1 June 2020, and
- the asset is installed and ready for use by 30 June 2020
a deduction of $140,000 can be claimed in the 2020 FY.
NB: To claim in the 2021 FY, you will need to have the asset installed and ready for use by 31 December 2020.
If the company is subject to a tax rate of 27.5% then this should reduce the tax payable by the company for the 2020 income year by $38,500.
If your business is likely to make a tax loss for the year, then the instant asset write-off is unlikely to provide a direct short-term benefit to you. However, if this measure is likely to reduce the taxable income of the business for the year then it may be possible to vary upcoming PAYG instalments to improve cash flow.
If the asset is a luxury car then the deduction will be limited to the luxury car limit ($57,581 in 2019-20).
The business use percentage of the asset also needs to be considered in calculating the deduction. For example, if a sole trader acquires a car for $40,000 but only expects to use it 80% in the business then the immediate deduction would be $32,000.
The increase to the instant asset write-off threshold in the stimulus package is the fourth increase or extension and businesses will need to be wary of what they are claiming and when:
At this stage, it is expected that the instant asset write-off threshold will reduce back to $1,000 from 1 January 2021 for small business entities and that the instant asset write-off rules will no longer be available to medium and large businesses.
For assets costing $150,000 or more
For small businesses (aggregated turnover under $10m), assets costing $150,000 or more can often be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. Having said that, depending on when the asset was acquired and first used in the business the rate of deduction in the first year could be higher (see accelerated depreciation deductions below).
If the closing balance of the pool, adjusted for current year depreciation deductions (i.e., these are added back), is less than $150,000 at the end of the 2020 income year, then the remaining pool balance can be written-off as well.
Pooling is not available for medium and large businesses, which means that the depreciation rules will apply to assets that don’t qualify for an immediate deduction.
Accelerated depreciation deductions
Businesses with a turnover of less than $500 million can access accelerated depreciation deductions for assets that do not qualify for an immediate deduction for a limited period of time.
This incentive is only available in relation to:
- New depreciable assets
- Acquired on or after 12 March 2020 that are first used or installed ready for use for a taxable purpose by 30 June 2021.
It does not apply to second-hand assets or buildings and other capital works expenditure. The rules also won’t apply if the business entered into a contract to acquire the asset before 12 March 2020.
Businesses can deduct 50% of the cost of a new asset in the first year. They can then also claim a further deduction in that year by applying the normal depreciation rules to the balance of the cost of the asset.
Accelerated depreciation deductions apply from 12 March 2020 until 30 June 2021. This will bring forward deductions that would otherwise be claimed in later years.
A business purchases a new truck for $250,000 (exclusive of GST) in July 2020.
In the 2020-21 tax return the business could claim:
- an upfront deduction of $125,000, and
- a further deduction for the depreciation on the balance of the cost.
Let’s assume that a 26.7% depreciation rate applies to this asset, which would mean an additional deduction of $33,375. Therefore, the total deduction in the 2020-21 tax return would be $158,375. Without the introduction of accelerated depreciation, the business would only be able to claim a deduction of $66,750.