What is the instant asset write-off and how can it help your business grow?

Introduction:

As business owners, we all know that managing our expenses is key to keeping our businesses afloat. So when the government offers us a tax break for making purchases, we jump at the chance!

The instant asset write-off scheme is one such opportunity, and it's available to business owners who make qualifying purchases of new or used assets.

Under this scheme, you can claim a tax exemption for those purchases up to a certain amount, which is set each year. This can be a great way to save on your taxes and reduce the cost of any new equipment you need for your business.

If you're interested in taking advantage of this scheme, it's important to understand exactly what qualifies as an eligible purchase and how this tax break works. Let's take a closer look at some of the key details of this program and how it could impact your business through this blog.

What is an instant asset write-off?

An instant asset write-off allows eligible businesses to deduct the cost of their certain business-related eligible assets immediately. The immediate deduction can be taken for new and second-hand assets used for business purposes, and it is available for a wide range of businesses, including sole traders, partnerships, companies, and trusts.

Businesses must meet a few eligibility requirements to take advantage of this scheme, but once these are met, the deduction can be claimed in the year the asset is first used or installed ready for use.

The instant asset write-off also helps businesses reduce their taxable incomes, ultimately leading to lower taxes and more money available to reinvest in the business. Hence, it is an invaluable tool for businesses looking to grow and expand.

What are the eligibility criteria for using an instant asset write-off scheme?

The eligibility depends on the following conditions:

• Your aggregated turnover. Aggregated turnover is the total ordinary income of your business and that of related businesses.
• The date when you purchased the asset.
• When the asset was first used or installed (ready to use).
• The cost of the asset is less than the threshold amount.
• This scheme cannot be claimed if your aggregated turnover is $500 million or more.
• As per the new rules introduced by the ATO, the instant-asset write off scheme will extend its coverage to include eligible purchases valued up to $20,000, which matches the maximum limit set back in 2015.

Note: The eligibility criteria and threshold for the immediate asset depreciation scheme keeps on changing. To ensure you follow the correct guidelines, it's important to regularly check the official ATO website. This will help you determine if your business is eligible and the correct threshold amount based on when you purchased, started using, or installed the asset.

What assets are eligible for immediate tax deduction?

Immediate tax deductions can be used for the following:

• Multiple assets if the cost of each individual asset is less than the relevant threshold amount.
• New and eligible second-hand assets.

Note: Small businesses need to apply a few simplified depreciation rules to claim this scheme as it cannot be used for the assets that are excluded from those depreciation rules. Additionally, it is important to note that instant asset write-off cannot be utilised for assets that you begin to possess, and first use (or have installed ready for use) for taxable purposes, starting from 7:30 pm (AEDT) on 6 October 2020 until 30 June 2023.

Examples of assets that can be claimed as an immediate deduction using the simplified depreciation rules:

• Tools and equipment such as electric sanders and saws
• Computers, laptops, and tablets
• Office and shop furniture, lighting, and fittings
• Office equipment, such as coffee machines
• Motor vehicles such as cars, vans, and tractors

Examples of assets that cannot be claimed as an immediate deduction using the simplified depreciation rules:

• Assets that are leased out or expected to be leased out for more than 50% of their remaining life
• Assets you assigned as a low-value asset (pool) before applying the simplified depreciation rules
• Horticultural including grapevines
• Assets that you have used in your research and development (R&D) activities
• Capital works, including buildings and structural improvements

Instant asset write off: Latest ATO updates

On May 9, 2023, the Australian Government proposed a measure as part of the 2023–24 budget to support small businesses. This proposal aims to enhance cash flow and reduce compliance burdens for small businesses by temporarily increasing the instant asset write-off threshold.

Under this proposal, small businesses with aggregated turnover of less than $10 million would be eligible to immediately deduct the full cost of eligible assets valued at less than $20,000. To qualify for this deduction, the assets must be first used or installed ready for use between July 1, 2023, and June 30, 2024.

It's worth mentioning that the $20,000 threshold applies to each individual asset, enabling small businesses to instantly write off multiple assets that meet the eligibility criteria.

Assets valued at $20,000 or more, which do not qualify for immediate deduction, can still be included in the small business simplified depreciation pool. These assets can be depreciated at a rate of 15% in the first income year and 30% in subsequent income years.

How can eligible businesses claim an instant asset write-off scheme?

Depreciating assets immediately is a great way to save on taxes if you are planning to purchase new business equipment. Here is how to claim the scheme:

First, you will need to purchase the equipment that you want to depreciate. This can be anything from office furniture to vehicles and machinery.

Next, you will need to calculate the value of the depreciating assets. This can be done by taking the cost of the asset and dividing it by the number of years that it is expected to last.

Once you have calculated the depreciation value, you will need to lodge a tax return and include the asset in your deductions. If you follow these steps, you should be able to claim this scheme with no problems.

As always, be sure to keep accurate records of all purchases and seek advice from a qualified accountant or tax professional to ensure you are making the most of the deductions available to you.

What are the benefits of instant asset write-offs to businesses?

Here are a few benefits businesses can explore:

• Cash flow improvement:

  The immediate deduction of the full cost of assets allows businesses to reduce their taxable income, which can lead to lower tax payments. This effectively frees up cash that businesses can use for other operational expenses or further investments.

• Simplifies tax processes:

  Instant write-offs simplify the depreciation process. Businesses can immediately write-off the asset in the year of purchase rather than track the asset's depreciation over several years, saving considerable time and reducing complexity.

• Flexibility in asset acquisition:

  Since the threshold applies to each individual asset, businesses can purchase multiple assets each costing less than the threshold and still write-off each one instantly. This provides greater flexibility in acquiring and replacing equipment as needed.

• Economic stimulation:

  By encouraging businesses to invest in assets, the scheme can help to stimulate the economy. This is particularly relevant in periods of economic downturn or slow growth, as increased business spending can help support economic recovery.

• Accelerates turnover of assets:

  The policy can also encourage businesses to upgrade or replace assets more frequently. This can lead to a faster turnover of assets, ensuring businesses are always equipped with the latest technology or machinery, which can increase their operational efficiency.

Final thoughts

The instant asset write-off is a valuable tax minimization benefit for businesses looking to invest in new equipment. Reducing your tax-payable income and improving cash flow can help you to save on taxes and boost productivity within your organisation.

Whether you are purchasing office furniture, vehicles, or other machinery, immediate asset depreciation can be a great way to save on taxes and improve your business performance. However, it is important to understand the eligibility requirements and process for claiming an immediate asset write-off so that you can get the most out of this tax deduction.

If you’re thinking about taking advantage of this initiative, CleanSlate can help. We offer a range of bookkeeping and taxation services designed to help small businesses grow and prosper. Contact us today to find out more about how we can help you make the most of the instant assets write-off scheme.