One of the most effective tax breaks of recent years has been the instant $20,000 asset write-off scheme for small businesses.
Under that tax break, small businesses are able to claim an immediate tax deduction for all assets acquired for use in the business up to a value of $20,000.
This could include anything from computer equipment to a coffee machine for the office kitchen to solar panels for the office roof.
The deduction isn’t a one-off; all qualifying purchases through to June 30, 2017 will count, up to an aggregate maximum of $20,000.
The good news is that motor vehicles are included within the scope of the scheme, so provided the vehicle you’re interested in costs less than $20,000, you can use the write-off to claim an immediate tax deduction.
The scheme is set to end on June 30, 2017, after which the write-off limit will fall to a far less generous $1000.
There’s a chance that the government may extend the current scheme but we just don’t know, so it makes sense to take advantage between now and the end of June in order to lock in the tax benefit.
Here are some tips and traps on buying vehicles using the small business asset write-off:
- The tax break is only available to small businesses
Under current law, that means your aggregate turnover (the turnover of the business acquiring the asset, plus the turnover of any other businesses you control) must be less than $2 million. There is a proposal before Parliament to increase this to $10 million (which would apply from July 1, 2016 if passed) but this is currently in limbo, with the government unable to get the measure through.
- In practice many vehicles will substantially exceed the $20,000 threshold
Assets which cost more than $20,000 do not qualify for the immediate tax break. These assets must be written-off over their effective lives. You may be able to get a second hand vehicle for less than $20,000, in which case, you can access the tax break since second hand assets are included. If the car itself doesn’t qualify, you may be able to purchase extra bits of kit for the car, or alternatively equipment to enable you to maintain the vehicle. Cars which typically fall within the price range are new, smaller hatchbacks and second-hand vehicles of all types.
- The $20,000 threshold is GST exclusive
If you see items quoted at GST inclusive prices, you can actually buy an asset priced at up to $22,000 (ie, $20,000 plus GST).
- Don’t let the generosity of the tax break override your commercial instincts
This tax break is ideal if you were planning to purchase assets anyway or have a real business need to invest. But remember, there’s no such thing as free money. You have to outlay cold, hard cash in order to get the tax element back so make sure any capital purchases fit with your overall business plan. If you’re not sure whether now is a good time to make a purchase or indeed whether to make a purchase at all, have a chat to your accountant who will be able to quantify the advantages and disadvantages for you.
- Beware of private use.
To claim the full deduction, the asset has to be used wholly in your business. If there’s an element of personal use, you can still claim the deduction but it needs to be pro-rated to reflect the element of personal use. So, if you spend $10,000 on an asset which is used 50% privately, you can only claim a deduction for $5000.
- Trading in can still put you over the threshold
Several commentators have suggested you could get the benefit of the $20k write-off on assets priced well above that by trading-in a currently held asset, particularly in the context of motor vehicles. For example, say you want to purchase a $30k vehicle and you trade-in your current vehicle for $12k. The difference is $18k which is less than the write-off threshold. So, you can claim the deduction, right? Wrong. The trade in on the old vehicle is regarded under tax law as being part of the consideration paid for the new vehicle. So, as far as the taxman is concerned, the price you’ve paid for the new vehicle is $30k. That’s above the $20k threshold so the instant asset write-off is not available and the whole $30k will have to be written off over the estimated life of the vehicle.