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Asset Write-off rules

Too good not to take advantage of

Over the last 18 months the government has provided massive tax stimulus’s to small businesses. One of these is the Instant asset write off rules.

Generally, in business you write off assets over their useful life. This is called depreciation. For small businesses they had the option of pooling their assets in claiming 30% in the first year and 15% thereafter. They may choose not to do this but instead use a useful life method and write-off their capital purchases over the effective life of the asset.

Depreciating assets include:

  • tools and equipment (for example, electric sanders and saws)
  • computers, laptops and tablets
  • office furniture (freestanding)
  • office equipment (for example, coffee machines)
  • motor vehicles (for example, cars, vans and tractors)

Some assets are excluded from the simplified depreciation rules or have specific treatment under the rules.

Asset Write-off Checklist.

Cost of asset

Under simplified depreciation rules (including instant asset write-off), the cost of an asset includes both:

  • the amount you paid for it, and
  • any additional amounts you spent on transporting and installing it ready for use.

The cost also includes amounts you spent on improving the asset.

Part of the tax stimulus measure were a continual expansions of the instant assets write-offs for eligible businesses. Hence an Eligible business can 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.

Put plainly if you acquire a depreciable item of equipment or motor vehicle, with a purchase price that is below the limits as dictated by the various measure, you can claim the cost of that assets as a 100% tax deduction. If you are planning to expand your business or need to replace equipment, it pays to consider doing this before June 30 as the write-off will reduce your current year’s tax. Also if 2021 has been a great year profit wise, it would pay to reduce your tax by bringing forward any asset purchases to take advantage of these rules. This will reduce your current year tax payable.

Instant asset write-off can be used for:

  • multiple assets, if the cost of each individual asset is less than the relevant threshold
  • new and second-hand assets.

If you are a small business, you will need to apply the simplified depreciation rules in order to claim the instant asset write-off. It cannot be used for assets that are excluded from those rules.

The instant asset write-off eligibility criteria and threshold have continually been changing. This eligibility and correct threshold amount depends on when the asset was purchased, first used or installed ready for use.

Recent changes

For assets first used or installed ready for use between 12 March 2020 until 30 June 2021, and purchased by 31 December 2020, the instant asset write-off:

  • threshold amount for each asset is $150,000 (up from $30,000).
  • eligibility extends to businesses with an aggregated turnover of less than $500 million (up from $50 million).

From 7.30pm AEDT on 6 October 2020 until 30 June 2022, temporary full expensing allows a deduction for:

  • the business portion of the cost of new eligible depreciating assets for businesses with an aggregated turnover under $5 billion or for corporate tax entities that satisfy the alternative test:
  • the business portion of the cost of eligible second-hand assets for businesses with an aggregated turnover under $50 million
  • the balance of a small business pool at the end of each income year in this period for businesses with an aggregated turnover under $10 million.

What are eligible businesses

Eligibility to use instant asset write-off on an asset depends on:

  • your aggregated turnover (the total ordinary income of your business and that of any associated businesses)
  • the date you purchased the asset
  • when it was first used or installed ready for use
  • the cost of the asset being less than the threshold.

You are not eligible to use instant asset write-off on an asset if your aggregated turnover is $500 million or more.

If temporary full expensing applies to the asset, you do not apply instant asset write-off.

Thresholds

There have been so many changes of the last couple of years that it is important to check the dates and rules. The following table contains all the rules. This table has been taken from the Australian Taxation Office’s web site:  
Instant asset write-off thresholds for small businesses that apply the simplified depreciation rules

For assets you start to hold, and first use (or have installed ready for use) for a taxable purpose from 7.30pm (AEDT) on 6 October 2020 to 30 June 2022, the instant asset write-off threshold does not apply. You can immediately deduct the business portion of the asset’s cost under temporary full expensing.

Instant asset write-off thresholds for businesses with an aggregated turnover of $10 million or more but less than $500 million

Exclusions and limits

A motor vehicle limit applies to the cost of vehicle that are designed to carry passenger.

There are also a small number of assets that are excluded.

Excluded assets

A small number of assets are specifically excluded from the simplified depreciation rules. Hence they do not qualify for the instant asset write off. A business can still write off these assets, but the general depreciation rules apply:

  • assets that are leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease
  • assets you allocated to a low-value assets (pool) before using the simplified depreciation rules
  • horticultural plants including grapevines
  • software allocated to a software development pool (but not other software)
  • assets used in your research and development (R&D) activities
  • capital works, including buildings and structural improvements.

For some primary production assets, you can use either:

  • the general depreciation provisions, or
  • the simplified depreciation rules.

Motor Vehicle limit

Be careful about the motor vehicle limits. We have seen many clients fall into this trap. A car limit applies to the cost of passenger vehicles (except a motorcycle or similar vehicle) designed to carry a load less than one tonne and fewer than 9 passengers.

The car limit is:
$59,136 for the 2020–21 income year.
$60,733 for the 2021–22 income year.

The one tonne capacity is the maximum load your vehicle can carry, also known as the payload capacity.

The payload capacity is the gross vehicle mass (GVM) as specified on the compliance plate by the manufacturer, reduced by the basic kerb weight of the vehicle.

The basic kerb weight is the weight of the vehicle with a full tank of fuel, oil and coolant together with spare wheel, tools (including jack) and factory-installed options. It does not include the weight of passengers, goods or accessories.

Payload capacity = GVM – basic kerb weight

The car limit does not apply to vehicles modified for use by people with disability.

You cannot claim the excess cost over the car limit under any other depreciation rules.
The instant asset write-off is limited to the business portion of the car limit for the relevant income tax year. For example, the car limit is $59,136 for the 2020–21 income tax year. If you use your vehicle for 75% business use, the total you can claim under the instant asset write-off is 75% of $59,136, which equals $44,352.

Warning: The above rules (as with all tax matters) can me a minefield and difficult to follow. The tax office loves to over complicate things. As always seek professional help to ensure you get this right and claim the maximum amount that you are entitled to.

Written by Allan Mason – Chartered Accountant
Founder of Encore Accounting Pty Ltd and Broadview Publishing

Author of :
Survival to Success – How to Play and Win the Game of Life
Business Bullseye – How to Succeed in Business
How to Choose an Accountant – Your most valuable team member.

Survival to Success – How to Play and Win the Game of Life

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