The past two years have been a roller coaster for business owners. From managing finances to maintaining normal day-to-day functions, many businesses across the world are still struggling to recover from the economic impact of the COVID-19 pandemic. Throughout the years, the Australian Government has taken various measures to help business owners, and these measures have been incredibly beneficial during times of crisis.
In a previous post, we discussed how small business tax offsets work and shared useful links to help you learn more. Today, we're going to talk about instant asset write-offs, how they work, and how businesses can make the most of them.
What is an instant asset write-off?
Tax deductions, typically applicable for work-related expenses, can help you reduce your taxable income. The instant asset write-off is a scheme introduced by the Australian Government to help eligible businesses claim an immediate tax deduction for the full cost of qualifying depreciating assets.
The instant asset write-off scheme allows business owners to write off the entire cost of an eligible asset. Until 2020, to be eligible, the cost of the asset had to be under $150,000.
However, in October 2020, the government announced that it would remove this threshold limit in light of the economic downturn caused by the pandemic. While this move was originally set to expire on 30 June 2022, the May Federal Budget 2020-21 extended it until 30 June 2023. This is called "temporary full expensing."
How the instant asset write-off works
If you are a business owner considering investing in or upgrading any business equipment, the instant asset write-off scheme can be helpful. Here is an example of how it works:
Let's say you run a confectionery company that has an annual turnover of $550,000 and a taxable income of $150,000. Since your turnover is less than $25 million, you will be subjected to paying the Australian company tax rate of 25%. In this case, your total tax liability is $37,500 (0.25 x $150,000).
However, when you purchase a commercial oven worth $40,000, its total value can be deducted from your net taxable income during the financial year, reducing the sum to $110,000 (150,000—40,000). So your new tax due will be $27,500 (0.25 x $110,000), which is $10,000 ($37,500 — $27,500). But to receive these benefits, you must meet the eligibility criteria for the instant asset write-off scheme.
Who is eligible to receive the instant asset write-off?
The write-off is available for Australian businesses (sole traders, partnerships, companies, and trusts) with a total annual income less than $5 billion. However, businesses with an aggregated turnover less than $50 million can also claim a deduction for eligible second-hand assets.
For the asset to qualify for a write-off, you must claim it in the fiscal year it was used or installed for business purposes. For example, if you buy machinery on 20 June 2023 (10 days before the deadline), but will not use it in business until 30 September 2023, you may not be able to claim a tax deduction for the 2022-2023 year.
If you buy an asset for your business that you also use for personal reasons, you can only deduct the portion of the value that is used for business. For example, if you buy a printer for $5,000 and use it for business 90% of the time, you would only be able to deduct $4,500 (90%) of the asset value.
Apart from having a registered ABN, your business must be actively operating to qualify for the write-off.
Your business can claim a deduction for any number of assets as long as the value of an item doesn't exceed the threshold.
Bear in mind that the eligibility criteria to receive the instant asset write-off may vary over time, so keep a close watch on the ATO website to keep yourself updated on any changes and additional eligibility requirements.
What assets can you claim under the write-off?
The instant asset write-off scheme covers most types of depreciating assets, with a few exclusions. Here are some examples of assets that you can claim as an immediate deduction under the instant asset write-off scheme:
Tools: lawn mowers, hammers, axes
IT hardware: laptops, tablets, printers, scanners
Office and shop furniture, lighting, and fittings
Office cars (Can be claimed up to the value of $150,000. Check out the ATO website to know more about the instant asset write-off rules for motor vehicles.)
How to claim the instant asset write-off?
You can request to write off an asset when you file your tax return. Ensure you have a copy of all purchase documents for validation purposes.
The instant asset write-off scheme aims to encourage businesses to invest in more capital resources and bring down the cost of asset purchases. But as we always suggest, thoroughly analyse how a purchase decision may impact your cash flow and long-term growth before you take advantage of any scheme.
We hope this post gives you some clarity about instant asset write-offs and what you can do to make the most of them. Have any other tax-related topics you'd like us to cover? Let us know in the comments!
Note: This article is intended only to help small business owners gain a basic understanding of instant asset write-offs. It should not be interpreted as legal advice for making business decisions. We recommend you reach out to the ATO directly through their business self-service portal or seek help from a tax professional for specific advice.