As a small business with a turnover under $2 million, you may be considering how to use the $20,000 immediate tax deduction that has been making headlines?
Before you start spending, there are a few things you should consider.
Is your business making a profit?
Deductions are only useful to offset against tax. If your business makes a loss then a tax deduction is of limited benefit because you’re not paying any tax. Losses can often be carried forward into future years but you lose the benefit of the immediate deduction.
Small businesses with a turnover of $2 million or under make up 97.5% of all Australian businesses. The latest Australian Taxation Office (ATO) statistics show that well under half of these businesses paid net tax.
So, if your business makes a loss and you start spending to take advantage of the immediate deduction, all you are likely to do is to increase the size of your losses with no corresponding offset.
The immediate deduction is not yet legislated
The $20,000 instant asset write-off is not yet law. The ATO only has the capacity to assess on current law not announcements. Remember that many of last year’s Budget initiatives have not been enacted.
The importance of Cashflow
Cashflow is more important than an immediate deduction.
If your business requires purchases and equipment to meet business needs, and you have the cashflow to support the purchase, then you may wish to proceed. Remember also that the $20,000 immediate deduction will apply as many times as you like and can be used for multiple individual purchases. However, your business is still required to fund the purchase for a period of time until you can claim the tax deduction and then, the deduction is only a portion of the purchase price.
Is your business eligible?
Are you eligible for the instant asset write-off?
The first test is that you have to be a business – not just holding assets for investment purposes. The second is the aggregated turnover of your business needs to be below $2 million. Aggregated turnover is the annual turnover of the business plus the annual turnover of any “affiliates” or “connected entities”. The aggregation rules are there to prevent businesses splitting their activities to access the concessions. Another entity is connected with you if:
– You control or are controlled by that entity; or
– Both you and that entity are controlled by the same third entity.
What has changed?
In general, a deduction is available for purchases your business makes. What has changed for small businesses under $2 million turnover is the speed at which they can claim a deduction. Before the Budget announcement, small business could immediately deduct business assets costing less than $1,000. On Budget night, the Treasurer announced that the threshold for the immediate deduction will increase to $20,000 at 7.30pm, 12 May 2015 for small businesses with an aggregated turnover less than $2 million. The increased threshold is intended to apply until 30 June 2017.
For small business, assets above $20,000 can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter.
If your business is registered for GST, the cost of the asset needs to be less $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price. If your business is not registered for GST, it is the GST inclusive amount.
How do I make the most of the immediate deduction?
There are a few tricks to applying the instant asset-write off:
Second hand goods are ok
It does not matter if the asset you are buying for your business is new or second hand. So, you could still claim the deduction on say, second hand machinery you have bought.
What is not included
There are a number of assets that don’t qualify for the instant asset write off as they have their own set of rules. These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.
Also, you need to be sure that there is a relationship between the asset purchased by the business and how the business generates income. For example, four big screen televisions are unlikely to be deductible for a plumbing business.
Assets must be ready to use
If you use the $20,000 immediate deduction, you have to start using the asset in the financial year you purchased it (or have it installed ready for use). This prevents business operators from stockpiling purchases and claiming tax deductions for goods they have no intention of using in the short term.
Business and personal use
Where you use an asset for mixed business and personal use, the tax deduction can only be claimed on the business percentage.