In the recent Federal Budget, the government announced a series of measures to assist small businesses, with one of these being an immediate write-off for depreciating assets that cost less than $20,000.  This measure, which has now been written into law, applies from the 2015 Budget night (7.30pm, May 12) to June 30, 2017.

At a glance

Before this write-off measure was announced, eligible small businesses were allowed to immediately deduct the cost of assets acquired for less than $1,000. The effect of the latest announcement is that the $1,000 threshold has been temporarily increased to $20,000. The threshold reverts to $1,000 after June 30, 2017.

Eligible “small business entities” can elect to use the simplified capital allowance rules. But note that this measure also disables the “five-year lock out” rule, so that businesses that previously opted out of the small business capital allowance rules can take advantage of the concession.

A “small business entity” is defined as any business with an annual aggregated turnover of less than $2 million. But remember that “aggregated turnover” takes into account not only the annual turnover of the business but also that of any entities “connected with” or that are “affiliates” of the business.  Ask this office for further assistance if required.

How does the $20,000 immediate write-off work?

A small business will be able to immediately deduct the “taxable purpose proportion” (that is, the amount used in the business for income producing purposes) of each depreciating asset costing less than $20,000.

For assets that cost $20,000 or more, small businesses can elect to use a general small business pool and depreciate the cost of such assets at 15% in the first year and 30% each year thereafter.

Is the $20,000 threshold GST inclusive or exclusive?

Broadly, the cost of the depreciating asset is reduced by the input tax credits a business may be entitled to claim for GST purposes. Therefore, 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 would be its GST-inclusive value because it is not entitled to claim input tax credits.

When can a small business claim the deduction? 

The deduction is claimed in the relevant income year for which the asset is “first used or installed ready for use” within the relevant period that this measure applies. There will therefore be no deduction available at the time that a business places an order and/or makes a deposit – the asset must also be actually used or be installed and ready to use within the relevant timeframe.

Note that a “first use” requirement has also been introduced as an integrity measure in the law – see more below.

If an asset costs $20,000 or greater, can the amount attributable to the “business use” be immediately deducted if that amount is less than $20,000?

There can be situations where a particular asset is partly used for a business’s income producing purposes (its “taxable purpose proportion”) and partly used for private purposes. But the legislation states that small businesses cannot apportion the cost of an asset between its business and private use and then make a claim for the business use portion if this works out to be less than $20,000.

For depreciating assets that cost more than $20,000, these assets must instead be allocated to a general small business pool.  The part of the asset’s cost which is related to the “taxable purpose proportion” (ie. the business use) is depreciated at 15% in the first year and 30% thereafter.

Are both new and second hand assets eligible? Are there exclusions?

Both new and second hand assets will be eligible, except for a small number of exclusions which receive different depreciation treatment for tax purposes.

Excluded assets include:

• horticultural plants — subject to their own “uniform capital allowance” rules
• capital works — subject to their own “capital works” depreciation rules
• assets allocated to a low-value pool or software development pool — subject to the deduction rates applicable under those rules
• primary production assets for which the entity has chosen to use the normal depreciation rules rather than the simplified depreciation rules, and
• assets leased out to another party on a depreciating asset lease.

Ask this office for a more thorough explanation if any of the above is applicable to your business.

Can a deduction be claimed for a general pool balance at year end where its value is less than $20,000?

Yes. Before this measure being enacted, small businesses with a general pool balance of less than $1,000 at the end of the income year were entitled to write-off that balance (referred to as the “low value pool” threshold). Now, the low pool value threshold has also increased to $20,000.

This means that an immediate deduction is available if the pool balance is less than $20,000 at the end of an income year. A small business therefore is able to claim an immediate deduction for the relevant year if its pool balance is less than $20,000 for the 2014-15, 2015-16 and 2016-17 income years. Thereafter, this reverts to the previous rules.

What is the “cost” of a depreciating asset?

As noted, a small business is allowed to claim an immediate deduction for the “cost” of a depreciating asset that is less than $20,000. However the legislation provides for two elements in the make-up of “cost”.

The “first element cost” is the amount taken to have been paid to hold a depreciating asset or to receive a benefit. This can include such things as the amount paid, the amount of a liability incurred, or the market value of non-cash benefits provided in acquiring the asset.

The “second element cost” is worked out after the asset is held, and includes:

• amounts to bring the asset to its present condition and location from time to time (such as improvement costs), and
• expenditure that is reasonably attributed to a “balancing adjustment event” for the asset (for example, disposal or scrapping of the asset).

Can a small business claim an immediate deduction for second element costs? 

Yes. A small business can deduct the taxable purpose proportion included in the “second element” of a depreciating asset’s cost (for example, an amount spent on improving or transporting a depreciating asset).

Example

Bruno’s Tailoring bought an industrial sewing machine on May 20, 2015, for $5,000, and uses it 100% for business purposes. It is able to write off the asset by claiming a $5,000 deduction in its 2014-15 tax return. In November 2015, a $2,000 overlocker is added to improve its functionality and for use in the tailoring business.

The cost of the original sewing machine (the first element) was written off in the 2014-15 income year, and the amount of the subsequent improvement of the overlocker (the second element) means that Bruno’s Tailoring is able to claim a $2,000 deduction in its 2015-16 income tax return.

How does the $20,000 immediate deduction apply to vehicle trade-ins?

Where a car is bought and part of the consideration includes trading in a vehicle, a common misconception is that an immediate deduction is available for the “change over value” provided that this value is less than $20,000.  This is simply not correct.

In these circumstances, the “cost” of the depreciating asset for the purposes of claiming an immediate write-off includes both the cash amount paid and the market value of any trade-in.  Where the cost is $20,000 or greater, an immediate deduction would not be available to the small business and the vehicle will need to be depreciated over time as mentioned above.

What integrity measures are in place?

A “first acquired” requirement has been introduced into the tax law as an integrity measure. This is an additional requirement for the increased $20,000 threshold to apply, and basically works to limit access to the increased threshold to “new” assets.

Requiring a depreciating asset to have been “first” acquired seeks to ensure that previously acquired assets cannot have been temporarily disposed of and then re-acquired after the May 12, 2015 commencement date, which would have given access to the immediate write off.

There are also the general anti-avoidance provisions already in the law. While a specific provision has not been included under the amendments, the government has indicated that assets acquired by businesses under artificial or contrived arrangements will not have access to the $20,000 write-off. An example of a contrived arrangement would be where a number of related small businesses that earned income from similar income sources sold their assets to one another in order to satisfy the “first acquired” requirement (a so-called “round robin” arrangement).