The recent 2020 / 21 federal budget has offered schemes for Australian businesses to help recover financially from the Covid-19 crisis in the form of tax deductions and tax offsets. One of these schemes has been changes to the Instant Asset Write Off (IAWO) so that businesses can buy equipment needed in an attempt to reinvigorate the economy.
The IAWO allows eligible businesses to claim an immediate tax deduction for certain costs relating to depreciating assets and introduced temporary measures that increases the IAWO previously in place.
Eligible small businesses with an annual turnover of less than $500 million (up from $50 million) will be able to claim an immediate deduction on amounts up to $150,000 (previously $30,000) for new and second hand plant and equipment assets. This includes items such as vehicles, tools and office equipment. The IAWO can also be used across multiple assets, if each asset is less than the threshold.
Assets must be first used or installed ready for use between 12 March 2020 until 30 June 2021 and purchased by 31 December 2020.
Temporary Full Expensing
From 7.30pm AEDT on 6 October 2020 until 30 June 2022, temporary full expensing was introduced which allows a deduction for:
- New eligible assets for businesses with an aggregated turnover under $5 billion or for corporate tax entities that satisfy the alternative test
- Eligible second hand assets for businesses with an aggregated turnover under $50 million
- Businesses with an aggregated turnover under $10 million can deduction the balance of the small business pool at the end of each income year.
Provided the above criteria are met, there is no limit on the cost of the item that can be claimed as a tax deduction.
Pro Tax Tip: Check with your tax agent to see whether your business should take advantage of the temporary full expensing measures before any purchases are made.
Car Limits
A car limit applies to the cost of passenger vehicles, designed to carry fewer than 9 passengers and is less than one tonne. The car limit is $57,581 for the 2019-20 income year and $59,136 for the 2020-21 income year. Vehicles that are not classified as cars according to the ATO’s definition do not have a cost limit.
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What Assets Are Eligible?
There are a number of assets that are eligible to be claimed. These are the assets where simplified depreciation rules apply and have a limited life expectancy and expected to depreciate in value. Such assets include:
- Tool and equipment
- Computers, laptops and tablets
- Office furniture
- Office equipment
- Motor vehicles
Some assets will be excluded from the IAWO or temporary full expensing. These assets must use the general depreciation rule. Such assets include:
- Those assets that are leased out or expected to be leased out for more than 50% of the time
- Those assets in the low-value depreciation pool
- Horticultural plants
- Software
- Assets used for R&D (Research & Development)
- Capital works
Pro Tax Tip: Where the deduction is not pro-rated for a company or trust, Fringe Benefits Tax may apply to the private use of the asset.
ITP Tax Accountants can advise if your business qualifies for the Instant Asset Write Off or temporary full expensing so that no mistakes are made and advise if this is a suitable step for your business to make.
Seeking tax advice from a tax agent or tax accountant is recommended before any purchases are made for your small business. It is important to understand which assets your business will be eligible for the IAWO or which will need to be depreciated over time.
ITP The Income Tax Professionals have been helping Australian individuals and business with their tax for 50+ years. Phone a friendly professional today to chat about how to take advantage of government schemed and reduce your businesses overall tax bill. Phone 1800 367 487 today.