2018 Budget - $20,000 immediate asset deduction for small businesses extended
The 2018 Federal Budget was handed down last week. There wasn't much in there for small business with the exception of the immediate asset deduction, which has been extended.
$20,000 immediate asset deduction for small businesses
Huh? As part of the budget announced last May, the Australian Government passed laws that temporarily allowed small businesses to claim an instant tax deduction on newly acquired depreciating assets costing up to $20,000. The good news is that these laws have been extended in the 2018 Budget.
Second-hand purchases are also covered under this, they must simply be new to the business. The $20,000 limit apples to the value of each asset to be claimed, not the total group of assets. There is no limit to the number of assets you can claim.
Are you eligible?
To be eligible, you must have an ABN and your aggregate yearly turnover must be less than $10 million.
What is a depreciating asset?
A depreciating asset is a piece of equipment or other item that has a limited life (i.e. it doesn't last forever) and loses value over the time you use it. A coffee machine is a good example.
What assets are covered?
Some examples of depreciating assets covered under this are: work vehicles, items such as cars, kitchen equipment, signage, air conditioners, fittings and furniture such as tables and chairs.
What isn't covered?
Land, software and stock (investments) do not fall into this category. Capital works such as building improvements are also excluded.
Does this apply to assets already held?
Maybe. These assets need to have been purchased on or after 13 May 2015 to be eligible.
Why should you care?
Each year, your business claims deductions that reduce the amount of tax you pay, with depreciation being one of those. Usually, depreciation is claimed in even amounts over a certain number of years. Under this new system, you can claim all of that depreciation in one year. Simply put, you can make a bigger reduction in the tax you pay this year, as opposed to smaller reductions over a number of years. It is not a payment you receive from the ATO, but rather one you don't have to make to them. The extra cash on hand is rarely a bad thing, and can be reinvested to your benefit.
Who is this good for?
This is ideal for those small businesses already planning on purchasing equipment this financial year, and acts as an incentive for those considering asset purchases. If you have extra cash on hand, and can foresee a need for assets now or in the future, it might be a good idea to take advantage of this.
It's important to remember that this is not an allowance for purchasing new assets, and any purchase you plan on making should be evaluated carefully. If you are making a loss for the financial year, then tax deductions are of little use and the purchase might best be deferred to a year where profits are expected to be realised.
A few caveats:
- Selling the asset after claiming the deduction will almost certainly mean that you will have to repay the tax you were able to avoid in the first place.
- It is important to note that the asset claimed must be used in an income generating capacity that is relevant to the business. This means that a new motorcycle, or a vintage guitar is unlikely to meet the criteria, as nice as that would be.
- The ATO will be watching this one pretty closely, and have publicly stated as much. They are planning on increasing compliance resources in the coming years, especially for SME's so any attempt to stretch the rules may be met with an unpleasant letter from the tax office.
- As with most things tax related, it is best to seek clarification from your financial adviser regarding purchasing decisions. Each business is different and what works for some might not for others.