Draft legislation closely tied to the repeal of the Minerals Resource Rent Tax (MRRT) has been cleared by the lower house of Parliament and if fully legislated, as is expected, will mean the present instant tax write-off for “individual” assets costing less than $6,500 (GST exclusive) will be reduced back down to $1,000. This measure is proposed to apply retrospectively from January 1, 2014 once made law.

Plant & equipment

From July 1, 2012 small businesses (with a turnover of less than $2 million a year) that use a small business depreciation pool have been entitled to claim an immediate deduction for plant and equipment costing less than $6,500. The draft legislation that has cleared Parliament means that this immediate deduction is to reduce to $1,000 for all assets acquired after December 31, 2013.

To have been eligible for the higher $6,500 immediate deduction for the 2012-13 financial year, the asset must have been first used or installed ready for use, on or before the last day of 2013. This means you could not write off the asset if you had simply placed an order, or even if you had pre-paid expenditure to acquire the asset by the end of the year. The actual physical installation or taxable use of the asset determined whether you could write it off.

The $6,500 immediate deduction also applied to improvements that have been made to existing items of plant and equipment, but again provided that the cost of these improvements was incurred on or before the relevant year’s end.

The changes to the law if they are passed in their current form will mean that for assets first used or installed ready for use from January 1 this year, only plant and equipment costing less than $1,000 will be able to be written off. An asset costing $1,000 (GST exclusive) or more will now need to be added to the small business depreciation pool, and depreciated at 15% in the year of acquisition, then 30% in subsequent years. So assets previously written off in full under this law will need to be depreciated over a number of years.

Motor vehicles

Also included in the legislation is the removal of the accelerated depreciation rules that apply to motor vehicles for relevant small businesses using pooling. As the rules stand now, a small business can claim up to $5,000 of the purchase price as an immediate deduction for a vehicle that was acquired on or after July 1, 2012. (Or, if the vehicle cost less than $6,500, the whole amount can be claimed as an immediate deduction under the above instant asset write-off provisions.) The balance of the purchase price is then added to the small business depreciation pool and depreciated at 15% in the year of acquisition, then 30% in subsequent years.

If the draft legislation is made law, the accelerated depreciation rules will only apply to motor vehicles purchased on or before the December 31, 2013. From January 1, vehicles will be treated like any other depreciable asset, meaning that if they cost $1,000 or more, the purchase price will need to be added to the small business depreciation pool and depreciated.

Cash flow

In any small business, cash flow is the number one concern. These measures essentially mean that a taxpayer must defer deductions to later income years where they wouldn’t otherwise have had to do so.

Basically this means where a taxpayer has relevant capital expenditure (which is a burden on cash flow in and of itself), that taxpayer will no longer have the benefit of totally writing off the relevant assets against their income. Instead, they will have to depreciate over a number of years, which will mean more of their income will be subject to tax in the current income year (again adversely affecting cash flow).