Further information has come to light on the specifics of the COVID-19 stimulus package announced by the Morrison Government.
Here's what we know so far:
'Instant Asset Write-Off' - increase and extension
Take advantage of this to reduce your tax bill and preserve your working capital.
From 12 March 2020, the instant asset write-off threshold increased from $30,000 to $150,000, and access to the write-off has been expanded to include businesses with aggregated annual turnover of less than $500 million until 31 December 2020.
How does it work?
The instant asset write-off is a tax deduction that reduces the tax liability of your business. It enables your business to claim an upfront deduction for depreciating assets in the year the asset was purchased and used (or installed ready to use).
- The $150,000 threshold applies on a per asset basis so eligible businesses can immediately write-off multiple assets
- Applies for new or second-hand assets first used or installed ready for use by 31 December 2020.
Let’s assume that a business purchases an excavator for $140,000 (exclusive of GST) on the 29th May 2020.
In the 2020 tax return, the business can claim the full $140,000 purchase as an upfront deduction.
If the business is a small business entity and using the simplified depreciation rules, without the introduction of this incentive, the business would only have been able to claim a deduction of $21,000 (i.e., 15% x $140,000).
What to claim and when?
This is the fourth increase or extension to the instant asset write-off and businesses will need to be wary of what they are claiming and when:
Assets will need to be used or installed between 12 March 2020 - 31 December 2020 to qualify for the higher threshold.
Anything previously purchased does not qualify for the higher rate but may qualify for one of the other thresholds. Similarly, anything purchased but not installed ready for use by 31 December 2020 will not qualify.
What assets are eligible?
The instant asset write-off only applies to certain depreciable assets. You will also need to ensure that there is a relationship between the asset purchased by the business and how the business generates income. You can't for example just go and purchase multiple television sets if they have no relevance to your business.
For more information on exclusions, please click here.
What businesses are eligible?
To access the instant asset write-off, your business needs to be a trading business (the entity buying the assets needs to carry on a business in its own right). It also needs to have an aggregated turnover under $500 million.
Aggregated turnover is the annual turnover of the business plus the annual turnover of any "affiliates" or "connected entities". The aggregation rules are there to prevent businesses splitting their activities to access the concessions. Another entity is connected with you if:
- You control or are controlled by that entity; or
- Both you and that entity are controlled by the same third entity.
Accelerated Depreciation - Important Details
In addition, the Government announced an alternative initiative for those assets that do not qualify for the instant asset write off...
Accelerated depreciation deductions will apply from 12 March 2020 until 30 June 2021.
This will bring forward deductions that would otherwise be claimed in later years. Businesses with a turnover of less than $500 million will be able to deduct 50% of the cost of the asset in the year of purchase.
They can also claim a further deduction in that year by applying the normal depreciation rules to the balance of the asset's cost. This will presumably only be relevant if the business cannot already claim an immediate deduction for the full cost of the asset under the instant asset write off scheme outlined above.
This incentive will only be available in relation to new assets that are acquired after 12 March 2020 and are first used or installed ready for use by 30 June 2021. It will not apply to second-hand assets or buildings and other capital works expenditure.
Let's assume that a business purchases a new truck for $250,000 (exclusive of GST) in July 2020. In the 2021 tax return the business would claim an upfront deduction of $125,000. The business would also claim a further deduction for the depreciation that would have arisen on the balance of the cost.
If the business is a small business entity and using the simplified depreciation rules, this would mean an additional deduction of $18,750 (i.e., 15% x $125,000).
The total deduction in the 2021 tax return would be $143,750. Without the introduction of this investment incentive the business would have claimed a deduction of $37,500 (i.e., 15% x $250,000).
Importantly, you do not need to pay cash to qualify for these deductions.
Assets financed (via a Chattel Mortgage) are eligible for the deductions available under both of these schemes.
The above measures are designed to support businesses to stick with the investments they had planned, and encouraging them to bring investment forward to support economic growth over the short term.
Please feel free to call your Broker if you'd like to discuss any of the above. We will keep you updated with any further developments as more details come to hand.