The federal Budget tax cuts and the increase in the asset Write-off threshold for Small businesses have generated a lot of media coverage and interest among small businesses. In this article, We’ll take a closer look at how the write-off and accelerated depreciation apply, and potential traps for small businesses and tax practitioners.
The instant asset Write-off threshold increase is a pleasant surprise for many small businesses that have held back on capital expenditure upgrades.
The government is hoping that this measure will encourage capital investment by small businesses over the next two years.
Small businesses tend to be more vulnerable to cash flow problems than larger businesses, because their profitability tends to be more volatile and they have lower levels of retained earnings. By allowing small businesses to write off more assets early, it will boost small business cash flow. While the bigger up-front tax deduction is a good thing, it will only make a cash flow difference when a business is in a tax payable position. If the business is not paying tax, this measure will not have an immediate cash flow benefit
New businesses tend to make large capital expenditures early on, A faster Write-off is welcome, on the assumption that a business is immediately profitable. Start-ups that will take years before they commence trading profitably will consequently not benefit from this change.
The benefit will also depend business entity is using. One-third of small businesses use a corporate entity, so the potential cash flow 88 benefit equates to an effective net taxi saving of $4,845 for an asset costing # $19,999. If the small business entity is being run as a non-incorporated business (sole trader, partnership or ; trust), then the tax benefit will depend; on the marginal tax rate of recipients of the business income.
Accelerated depreciation
As announced in the 2015 federal Budget, the government is amending the accelerated depreciation for small businesses, by temporarily increasing the threshold under which certain depreciating assets and general small business pools can be written off.
The increased threshold of $20,000 is available to all small businesses, including those that previously opted out of the simplified | depreciation rules. It applies only to assets – both new and second-hand – that were first acquired at or after 7.30pm on 12 May 2015 and were first used or installed ready for use on or before 30 June 2017.
The requirement that an asset be ‘first acquired at a particular time is an additional requirement for the increased threshold. It ensures that the threshold only applies to a small business entity’s ‘new’ assets. Requiring a depreciating asset to have been ‘first acquired by the | small business entity means that assets cannot satisfy the acquisition requirement if they were acquired at an earlier time, temporarily disposed of then reacquired at or after the 12 May 2015 start time.
Who qualifies?
Any business that meets the definition of a small business entity – that is, one with an aggregated turnover of less than $2 million – may be eligible to immediately deduct the cost of assets acquired for less than $20,000. If you are not considered to be running a business (ie hobby activities or passive investment) for tax purposes, then you are not eligible for the concession, even if you have an ABN. Practitioners should also be mindful of Personal Services Income (PS) and Non Commercial Loss (NCL) rules, which can either deny or quarantine losses.
How is the GST treated?
If the entity is registered for GST, then the GST-exclusive amount is taken to be the cost of the asset. Where the | entity is not registered for GST, then the GST-inclusive amount is taken to be the cost of the asset. So, for example, if you are a registered GST i business that purchases an asset with a taxable purpose of 100 per cent, the cost of the asset needs to be less than $21,999 GST inclusive, before GST credit is clawed back.
Installation costs that form part of the second element of the cost of the asset must also be included for the purposes of working out whether the asset meets the threshold test. if the asset cannot perform its intended function without other things being done – for example, a 3D printer that requires software in order to function or a Coffee machine that needs plumbing to make it operational – then it is likely that those other things need to be included in the cost of the asset for threshold purposes.
Potential traps
The IPA expects disputes will arise as to what constitutes an asset for the purposes of measuring the less than-$20,000 limit. For instance, is an item to be properly viewed as an asset in its own right or is it part of a larger asset? This will be a question of fact and degree, taking into consideration all the relevant circumstances of the particular case. The ATO provides some guidance in Tax Ruling 94/11.
It’s a hard cut-off, with assets valued at more than the threshold amount ineligible for immediate deduction; however, they may be placed in the small business depreciation pool and depreciated at 15 per cent in year one and 30 per cent in subsequent years. There’s no limit on the number of assets that can be immediately deductible, but each must cost less than $20,000.
Another thing to note – and a trap for many – is that the cost of the asset must be less than $20,000 before the taxable proportion is worked out, as illustrated in the following example: Dary’s Electrical acquires aute for $40,000 on 28 July 2015. Daryl’s Electrical estimates that the ute has a taxable purpose proportion of 40 per cent for the 2015/16 income year. As the ute cost more than $20,000, Daryl’s Electrical is unable to immediately deduct the cost of the ute. The ute is added to Daryl’s Electrical’s general small business pool.
Are all assets eligible?
All assets will be eligible, except for a small number of exclusions that receive different depreciation treatment. Assets excluded from the depreciation rules include horticultural plants and in-house software allocated to a software development pool.
An eligible small business can claim an immediate deduction for any software purchased off the shelf, costing less than $20,000, that is used exclusively in the business, An eligible Small business can also claim an immediate deduction for the cost of developing software for use exclusively in its business, where the cost is less than $20,000. An exception applies if the entity has previously chosen to claim deductions for in-house software under the software development pool rules. In this case, the costs need to continue to be allocated to that pool.
A special label in the tax return will be used to identify how much any entity has claimed using the immediate write-off concession, so expect some audit activity from the ATO. There will be an onus on tax practitioners to ensure that clients meet the eligibility rules for immediate write-off as part of their tax preparation work. This may require practitioners to review client records that support the deduction claim, to ensure compliance.
