$20,000 Asset Deduction for Small Businesses

The government announced in the 2015 Federal Budget certain taxation measures to assist small business entities. The objective of the move is to ease cash flow pressures on small businesses.

One of the main initiatives is the availability of an immediate write-off for individual depreciating assets that cost less than $20,000. Accelerated depreciation for low value pool balances below $20,000 is also now permitted. This tax break applies from 17 May 2015 to 30 June, 2017. Prior to the announcement the write off threshold for assets was $1,000.

Who is eligible?

The immediate tax deduction only applies to ‘Small Business Entities’, which have an annual turnover of less than $2 million.
The turnover test includes the aggregated turnover of affiliates and connected entities that are also engaged in carrying on the business. To qualify, you must be running a business. Simply having an ABN isn’t enough.

What assets can be deducted?

The tax deduction only relates to assets purchased as part of running a business. This means no tax deduction is allowed for private assets, such as a car only used for private purposes. The deduction is also limited to the business use of an asset that is used for both business and private purposes.

Assets that cost $20,000 or more (which can’t be immediately deducted under other provisions) are deducted over time using the general small business pool. Under the pooling mechanism a deduction for 15 per cent of the cost is allowed in the first income year with a diminishing value rate of 30 per cent deduction on the opening pool balance allowed for each income year thereafter.

There is no limit to the number of assets each under the $20,000 threshold that can be claimed in an income year.

If an asset is used for business and private purposes, the deduction is apportioned and only the business proportion is deductible.
If an asset costs more than $20,000, but is only used partially in a business, to a value of less than $20,000, the deduction is not immediately allowable and the asset should be included in the small business pool.

The new laws also include changes to allow primary producers to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills.

What assets may be excluded?

Assets excluded from the additional deduction include horticultural plants and in-house software allocated to a software development pool. In most cases specific depreciation rules apply to these excluded assets. However, an eligible small business can claim an immediate deduction for the cost of purchasing business software off the shelf, or developing software for use exclusively in its business where the cost is less than $20,000.

An exception applies if the entity has previously chosen to claim deductions for in-house software under the software development pool rules. In these cases the costs need to continue to be allocated to a software development pool.

How does the GST work?

For a business that is registered for GST, the cost of the depreciating asset is its GST-exclusive value provided that the business can fully claim the credit. If a business is not registered for GST, the cost of the depreciating asset is its GST- inclusive value because it is not entitled to claim input tax credits.

When can the deduction be claimed?

The deduction is claimed in the relevant income year in which the asset is first used or installed ready for use within the period that this measure applies. Simply placing an order with a supplier will not satisfy the requirements for claiming the deduction.

What’s the tax benefit?

The income tax benefit will depend on whether your small business has a taxable income. Deductions are only useful to offset against a tax liability. 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 cash benefit of the immediate deduction. The non-commercial losses rules may also prevent claiming the business loss against other sources of taxable income.

The benefit of the tax deduction will be 28.5% of the value of the purchase price of the asset for the 2016 financial year, following the tax rate reduction from 1 July 2015 for small business entities from 30%.

If you have any questions about the government’s new Asset Deduction measures, contact CIB Accountants & Advisers on 02 9683 5999.