One of the most effective tax breaks of recent years has been the instant $20,000 asset write-off scheme for small businesses.
In good news for small businesses, the Treasurer announced in last night’s Federal Budget that the scheme, which was due to end on 30 June, 2017, will be extended for a further year and will now expire on 3 June, 2018.
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 will count, up to an aggregate maximum of $20,000.
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.
When the extended scheme ends on 30 June, 2018, the write-off limit will fall to a far less generous $1,000.
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. The definition of a small business has been extended to include all businesses with an aggregate turnover of less than $10 million (it was previously $2 million) so tens of thousands of extra businesses are now able to take advantage of the tax break as it enters its final year.
- 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, so 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 $5,000.
- Several commentators have suggested you could get the benefit of the $20,000 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 $30,000 vehicle and you trade-in your current vehicle for $12k. The difference is $18,000 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 $30,000. That’s above the $20,000 threshold so the instant asset write-off is not available and the whole $30,000 will have to be written off over the estimated life of the vehicle.