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Nina Hendy May 17, 2022
The lead up to the end of the financial year is the ideal time to contemplate whether or not you could benefit from the Instant Asset Write-Off.
The Instant Asset Write-Off is one of the most discussed tax breaks out there for businesses, because it enables businesses to acquire assets and claim an immediate tax deduction.
But that doesn’t mean you should necessarily rush off and start spending ahead of EOFY.
This article steps you through what the Instant Asset Write-Off is, as well as how it’s applied, with some updates on other technicalities like Temporary Full Expensing.
What is the Instant Asset Write-Off?This measure enables eligible businesses to 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.
This form of accelerated depreciation enables a business to reduce its taxable income by deducting eligible purchases – resulting in a cashflow benefit relative to the rate that you have been taxed at.
Best of all, it can be used for multiple assets if the cost of each individual asset is less than the relevant threshold, or for new and second-hand assets.
Small businesses need to apply the simplified depreciation rules in order to claim the Instant Asset Write-Off and it cannot be used for assets that are excluded from those rules.
How does the Instant Asset Write-Off work?This tax break is not a cash handout. It’s a deduction that reduces your taxable profit.
If you operate as a company and spend, for example, $30,000 on a capital purchased you need to run your business, then assuming a tax rate of 27.5 per cent, the company will receive a 27.5 percent deduction, which equates to an $11,000 reduction in tax. This means that the company will still have a net cash outlay of $29,000 on this purchase.
Plus, be sure you pro-rate the deduction for any private use – to claim the full deduction, the asset has to be used solely for business purposes.
What’s the purchase threshold for the Instant Asset Write-Off?Good news. During COVID, the threshold increased from $30,000 to $150,000 per asset acquired.
That means businesses with an aggregated turnover between $50 million and $500 million may be eligible to deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31 December 2021 and first used or installed by 30 June 2022.
It works by enabling eligible businesses to claim a deduction straight away for the portion of the cost of an asset first used or installed ready for use.
Make sure you check your business’s eligibility and that you apply the correct threshold amount depending on when the asset was purchased, first used and installed ready for use.
How do you claim the Instant Asset Write-Off?If you’re a small business, you will need to apply the simplified depreciation rules in order to claim the Instant Asset Write-Off.
The measure cannot be used for assets that are excluded from those rules, and sole traders are also eligible for it.
MYOB recommends consulting with a qualified tax practitioner regardless of the size and complexity of your business in order to maximise your tax return and maintain compliance with the law.
What’s Temporary Full Expensing?The Instant Asset Write-Off has been extended with a measure dubbed ‘Temporary Full Expensing’. You can claim your deduction when lodging your 2021-22 or 2022/23 tax returns.
It’s estimated that millions of Australian businesses will be eligible for the scheme in a move set to encourage spending among businesses.
Temporary Full Expensing allows for an immediate deduction for purchases of new, eligible depreciating assets (for businesses with an aggregated turnover under $5 billion), eligible second-hand assets (for businesses with an aggregated turnover under $50 million) and the balance of a small business pool at the end of each income year in the period (for businesses with an aggregated turnover under $10 million).
Again, this measure is designed to support businesses and encourages investment, as eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it’s first used or installed ready for use for a tax purpose.
What’s the catch with tax write-offs?Businesses just need to follow certain rules to make sure they can claim the cost of any asset.
The asset needs to be purchased and installed within the time period the Government specifies – in this case, from 6 October 2020 up to June 2022.
It goes without saying, but it needs to be ready for use – you can’t just have it lying around and then plan to install it a couple of years from now.
Of course, you have to be in business to claim the Instant Asset Write-Off. Having an ABN is not enough.
It’s another reason why it’s so important for businesses to have their expense tracking and documentation under control.