The 2023–24 financial year brings with it a significant update from the Australian Government—a generous increase in the instant asset write-off threshold. This move, announced as part of the Federal Budget on May 9, 2023, is poised to bolster the cash flow of small businesses and streamline compliance processes.
But what does this mean for small business owners? How can you leverage this change to your advantage?
Before this policy becomes law, it’s important to understand its implications. Here, we’ll unpack the details of the increased threshold, explore who stands to benefit, and provide insights into how to make the most of this temporary measure. Whether you’re planning to invest in new equipment or upgrade your existing assets, read on to find out how this change could impact your business’s bottom line.
Instant Asset Write Off Extension
In the fiscal period of 2023–24, the threshold for the instant asset write-off has been raised to $20,000, as declared by the Government. This announcement was made on May 9, 2023, during the unveiling of the Budget for the year 2023–24. The Australian Government has taken this step to enhance the cash flow for small businesses and to simplify compliance requirements. This incentive is designed to be temporary, extending from July 1, 2023, to June 30, 2024.
Pro Tax Tip: This policy has not yet been enacted into law. To read more about the 2023-24 budget, click here.
The initiative targets small businesses with an aggregated annual turnover of less than $10 million. These businesses will be eligible to immediately write off the total cost of qualifying assets. The assets must be priced below $20,000 and must be put into use or be ready for use within the specified timeframe, starting from July 1, 2023, to June 30, 2024.
The benefit of this increased threshold is that it applies to each individual asset. Therefore, small businesses have the opportunity to apply the instant write-off to numerous assets, provided each one meets the criteria.
For assets that are priced at $20,000 or above, which do not qualify for immediate deduction, there is still a provision. These assets can be added to the small business simplified depreciation pool. In the first year of income, these assets can be depreciated at a rate of 15%, and in subsequent years, the depreciation rate will be 30%.
How The Instant Asset Write Off Works
To take advantage of the elevated $20,000 instant asset write-off threshold, small business entities must meet certain criteria during the 2024 income year. The business must be operational, adhering to the general principles of conducting a business. Aggregated annual turnover should not exceed $10 million, a figure that can be determined based on the turnover of either the current or the preceding year.
The business must elect to utilize the simplified depreciation rules for the income year in question. The assets in consideration must individually cost less than $20,000 and should be put to use or be ready for use within the specified period, starting from July 1, 2023, to June 30, 2024, for purposes related to the business’s taxable activities.
If a small business entity does not opt for the simplified depreciation rules in the 2024 income year, it will not be eligible for the instant asset write-off, even if all other conditions are satisfied.
The threshold applies to each asset separately, which means that a small business can potentially claim the immediate deduction for several assets, provided each one’s cost does not exceed $20,000 during the 2024 fiscal year.
The raised instant asset write-off threshold has implications for the balance of the small business pool. A $20,000 threshold is used to determine if the entire balance of the pool can be written off in the 2024 income year. The calculation for this does not consider the closing balance of the pool but rather what the balance would have been without the current year’s depreciation deductions.
The rules that typically prevent small business entities from re-adopting the simplified depreciation regime for five years after opting out will remain inactive until June 30, 2024. This suspension of the lock-out rules provides additional flexibility for small businesses during this period.
What Assets Are Eligible?
The provisions for the instant asset write-off are specifically designed for assets that are eligible for depreciation. Any costs incurred from capital improvements to buildings, which are governed by the capital works deductions, are not eligible for this write-off.
For assets that are priced at $20,000 or above, which do not qualify for the instant deduction, there is an alternative. These higher-cost assets can be added to the small business general pool. In the initial year of purchase, these assets are subject to a 15% depreciation rate. In the following years, the depreciation rate increases to 30% for each year.
Utilizing the services of a tax agent can be highly beneficial in determining whether your business can take advantage of the instant asset write-off. A tax professional will not only help you assess if this incentive is appropriate for your business circumstances but can also provide guidance on a range of other tax-saving strategies tailored to your small business needs. Their expertise can ensure that you maximize your tax benefits while remaining compliant with the latest tax laws and regulations.