Is it time to buy up big before 30 June year end?
By now you have probably been bombarded with advertising and information from retailers telling you all about the tax savings that can be had by buying their product and fully expensing it in your business under the increased and extended Instant Asset Write Off or Temporary Full Expensing rules.
Car yards, tool companies, farm equipment manufacturers, yellow goods suppliers, office equipment retailers and even camper trailer manufacturers, have all been spruiking the ease with which you can simply buy their product and “get your tax back immediately”.
Now, not to put too fine a point on this type of advertising – but they may have a vested interest in telling you something, in order to make greater sales themselves – so what is the truth of the matter?
As touched on in our recent blog “Tax Planning – Organise yourself before 30 June 2022” (05/05/22), the Temporary Full Expensing provisions are still available until 30/06/2023, and provide an opportunity for many businesses to acquire assets and claim an immediate tax deduction rather than amortising them over the useful life of the asset.
The ATO guidance on this legislation is provided under Law Companion Ruling LCR 2021/3, which explains the measures for :
Who qualifies as an eligible entity
What qualifies as an eligible asset
How to calculate the deduction
But does all this mean that you should rush out and start spending ahead of EOFY?
Well, it depends …
What is the Instant Asset Write-Off?
It allows eligible businesses to claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.
This form of accelerated depreciation is aimed at encouraging investment and enables a business to reduce its taxable income by deducting eligible purchases – resulting in a cashflow benefit relative to the rate at which you have been taxed.
It can be used for multiple assets if the cost of each individual asset is less than the relevant threshold, or for new and second-hand assets.
Small businesses need to apply the simplified depreciation rules in order to claim the Instant Asset Write-Off and it cannot be used for assets that are excluded from those rules.
How does the Instant Asset Write-Off work?
This tax break is not a cash handout - it’s a deduction that reduces your taxable business profit.
So, it stands to reason that you need to be conducting a business, not simply hold an ABN. However, the type of business you conduct may be a company, trust, partnership or sole trader.
For example, if you operate as a company and spend $50,000 on a capital asset you need to run your business, then assuming a tax rate of 25 per cent, the company will receive a $12,500 tax benefit, meaning that the company will have an effective net cash outlay of $37,500 on this purchase.
Obviously, to claim the full deduction, the asset has to be used solely for business purposes – so any non-business or private use needs to be pro-rated or reduced – and the asset needs to be installed and ready for use in the year of claim.
Given the large business benefits possible under these write off allowances, the ATO has flagged the potential application of Pt IVA if an arrangement is "driven by tax, rather than commercial, outcomes".
What is the purchase threshold for the Instant Asset Write-Off?
The threshold was increased from $30,000 to $150,000 per asset acquired, for businesses with an aggregated turnover between $50 million and $500 million.
What is Temporary Full Expensing?
This is essentially an extension of the Instant Asset Write Off provisions, which enlarges the scope of the Instant Asset Write Off by not stipulating a maximum cost of assets and making large business entities eligible.
Temporary Full Expensing allows for an immediate deduction for purchases of new, eligible depreciating assets (for businesses with an aggregated turnover under $5 billion), eligible second-hand assets (for businesses with an aggregated turnover under $50 million) and the balance of a small business pool at the end of each income year in the period (for businesses with an aggregated turnover under $10 million).
Again, this measure is designed to support business and encourage investment, allowing them to claim an immediate deduction for the business portion of the asset in the year it’s first used or installed ready for use for a taxable purpose.
Is it for me?
As with any business decision, outlays for assets must be considered in relation to the impacts that it will have on cashflow and the relative benefits that may be achieved from installing a new piece of equipment.
Need Cordner Advisory to help?
We would suggest that before you rush out and buy, talk with us to do some analysis of your eligibility and the potential upside and downside for your business. Please call our office on (07) 5504 5700 to speak to one of our trusted advisors today.
Cordner Advisory - Your Business Advisory, Accounting & Tax Specialists. Catering for clients all across Australia, from the golden beaches of the Gold Coast and Sunshine Coast to the capital cities such as Brisbane, Sydney and Melbourne
June 30th is around the corner. Seize the opportunity to improve your tax situation by making smart buys. Need guidance? Contact Cordner Advisory for expert advice!
