Small businesses only have a few more months until 30 June 2017 to claim an immediate tax deduction for depreciating asset purchases under $20,000 (excluding GST). After this date, the limit will revert back to the previous threshold of $1,000.
The temporary threshold increase (introduced in the 2014-15 Federal Budget) was intended to encourage spending by small businesses to stimulate the Australian economy. Since 12 May 2015 when the law change was brought in, many small businesses have taken advantage of the increased threshold to purchase new machinery and equipment for the workplace. Assets we have seen deducted range from general office equipment (e.g. computers, laptops, iPad, copiers and coffee machines), office furniture, and motor vehicles, to less common items such as artwork, TV’s, Nintendo Wii’s and ping-pong tables.
What conditions must be satisfied?
The following general conditions must be satisfied to qualify for the $20,000 immediate write-off:
1. The taxpayer is a small business entity (SBE). That is, the entity must be carrying on a business and have aggregated annual turnover of less than the $2 million (Note: we are still waiting for the proposed increase to the small business turnover threshold to $10 million with effect from 1 July 2016 to be passed into law).
2. The depreciating asset is acquired and installed ready for use in the business on or before30 June 2017.
3. The SBE has chosen to use the small business depreciation rules (i.e. asset pooling and low value asset write-offs) for its depreciating assets.
4. The asset is not trading stock of the business. Note that certain assets (namely horticultural plants and pooled in-house software) are excluded from the small business depreciation rules.
Common misconceptions and errors
We have outlined below some common misconceptions and mistakes made by taxpayers in applying the immediate write-off to asset purchases:
- The asset doesn’t have to be new. Second-hand items may also qualify for the immediate write-off.
- The asset does not need to be purchased from an Australian supplier. Items can be purchased online or from overseas as long as it is used in the business.
- The allowable deduction is limited to the extent to which the asset is used for a taxable purpose. An apportionment is required where the asset is only used partly for income producing purposes (for example, if an asset is 30% used for private purposes, only 70% of the cost is claimable).
- Expenditure on assets, such as building and structural improvements, that fall within the definition of ‘capital works’ are not eligible for the immediate write-off.
- Assets purchased for an investment property are generally not eligible for the immediate write-off as renting a property to derive passive income would not be considered carrying on a business. However, if the taxpayer is carrying on a business of managing investment properties then the immediate write-off may be available. Whether a business is being carried on is dependent on the facts and circumstances of each case.
- Artwork that is being collected (for example, where a painting is placed into storage or displayed in a private residence or public art gallery) is not eligible for the immediate write-off and is instead subject to special capital gains tax (CGT) rules for ‘collectables’.
Tax planning opportunities
The immediate write-off is a great way for small businesses to maximise their tax deductions for the2017 income year. In saying that, any decision by business owners to spend their hard-earned money should first and foremost be aligned with the commercial objectives of the business.
Some other tax considerations to keep in mind:
- If the proposed $10 million turnover threshold increase is passed into law, a substantial number of Australian businesses may find themselves within the SBE rules. This provides businesses that previously didn’t have access to the SBE tax concessions with numerous tax planning opportunities prior to 30 June 2017.
- However, small businesses also need to be mindful of the ‘lock-out’ rule that will return into effect from 1 July 2017 where, if an entity chooses to stop using the small business depreciation rules, they cannot choose to use the rules again until at least 5 years after the income year in which they chose to stop using the rules. The lock-out rule may have an impact on some small businesses that have chosen to take advantage of the increased $20,000 immediate write-off and then choose to stop using the small business depreciation rules after 1 July 2017.
For more information, you can get in contact with Andrew Lam or Winson Liew.