The $20,000 immediate asset write off demystified

With the new budget measures regarding the $20,000 immediate write off of assets, it is a timely reminder that the best advice for a small business comes from a financial advisor, not the bloke at the pub, the car dealer, or just some mate who claims to be an expert on tax matters.

Since the budget announcement of the immediate write off of assets less than $20,000 for small business (effective from 7.30pm on 12th May 2015 until 30 June 2017), I have been asked many questions, and have noticed a significant level of misunderstanding in regard to this new, temporary tax concession.

So in an attempt to demystify the tax concession, here are a few points that may help you to understand how it will work.

1. You need to be “in business”.  The ATO have some measures in place to determine if a business is a genuine business, or not. You cannot simply just get an ABN, say that you are in business, and get a tax deduction for that new asset. This tax concession does not apply to assets bought for salary and wage earners, nor assets for rental properties – only for those in business.
2. You need to be a “small business”. While there are many definitions of a small business, the definition that applies to allow you to access this tax concession is that your turnover is less than $2 million per year. Grouping provisions will apply, so you will not be able to create a new “small business” to access these concessions if you are already in a business that is too big (larger than $2 million turnover).
3. The asset must relate to the business. The same rules that have always applied in regard to the deductibility of an asset, still apply. You cannot just buy any asset to claim this tax deduction. The asset must be for a genuine use in the business. So unfortunately, you cannot just go and buy a jet ski (unless you legitimately need a jet ski to run your business).
4. This is a tax deduction, not a tax refund. You will get a tax deduction for the expenditure on the asset, which should reduce the amount of tax payable, at your marginal tax rate. You do not get back the $20,000 – you just save having to pay tax on that amount.
5. The marginal tax rate on zero income, is zero. In other words, you won’t save on tax if the business is not paying tax in the first place. (Note there are some circumstance where you may get some tax back, but in general, you need to be making money to take advantage of this concession).
6. An asset over $20,000 cannot be broken into smaller assets under $20,000. The asset will be considered as a whole, not a few parts to make the whole. Likewise, a car will be considered at its whole value, not the changeover price. So if there is a $30,000 car with a $15,000 trade in, leaving $15,000 to pay – the asset is still $30,000 and you will not be able to access the concession. You will need to depreciate the car over a number of years.  The $20,000 will be exclusive of GST, and there is not a limit of $20,000 per business – the limit is per asset. As such you can buy a number of assets under $20,000 and claim the immediate deduction on each of them. The asset does not have to be paid for outright – the government is encouraging you to borrow money with this current low interest rates to invest in new capital.
7. Immediate means that the deduction will be in the current year, not that you will get the money back immediately. Your tax agent will include this in your tax calculation when they prepare your tax return.   As such, immediate means the deduction will apply in the current year, not over a number of years in the way depreciation traditionally works.

I am sure there are many more questions out there, but can I please ask you to check with your financial advisor prior to making a large commitment to spend money just for the sake of a tax deduction. You need to understand if you can access the concession and what impact this will have on your business.