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How Do Instant Asset Write-Offs Work?


July 21, 2022 ( Newswire) Back in March 2020, the ATO modified the instant asset write-off scheme in an attempt to help businesses that were struggling with the challenging impact of Covid.

This scheme helped thousands of businesses in Australia to navigate their way through the tricky waters of the pandemic. Providing a vital lifeline that helped them stay afloat during the choppiest of tides.

The good news is that the scheme has been extended to cover the 2022/23 tax year. So, if you have not yet taken advantage of it, now may well be a great time.

In case you are not aware of the scheme or are unsure of what it entails, this article provides an overview of what you need to know.

What is the Instant Asset Write-Off?

The Instant Asset Write-Off is one of several tax concessions currently in place for small businesses.

A temporary tax deduction scheme can be taken up by all Australian businesses that have an annual turnover of below $5 billion.

Under the scheme, eligible businesses are entitled to claim an immediate deduction on qualifying assets that cost up to $150,000. So long as they are installed and fully operational by June 30th, 2023.

This is a dramatic increase from the previous threshold of $30,000 and applies to both new and second-hand assets.

So long as each purchase is less than $150,000, there is no limit on the number of assets eligible businesses can claim.

What this means is that these businesses can buy multiple assets and effectively write off their total expense within their tax return for that financial year.

An example of how the Instant Asset Write-Off could work for you

To provide you with some context, here is an example of how the instant asset write-off can be used to reduce your company's taxable income:

Company X is a small business that achieves a turnover of $2,400,000 and a taxable net income of $480,000.

Given their small-scale company structure, and that their turnover is less than $50 million, they are required to pay an Australian company tax rate of 25%.

This means they need to pay $120,000 in tax, which equates to the sum of 0.25 x $480,000.

Now imagine that under the instant asset write-off scheme, Company X purchased $80,000 of eligible assets during the financial year.

The overall value of the assets they bought would then be deducted from the amount they are required to pay in net taxable income – which would reduce the figure to $400,000.

Because of the instant asset write-off tax concession, the total amount of tax payable would reduce from $120,000 to $100,000.

This is because they would only have to pay 0.25 x $400,000, as opposed to 0.25 x $480,000.

Considering these tax savings, the real cost to Company X, of the assets they bought is $60,000. Which is what is left after you subtract the $20,000 tax saving from the original cost of $80,000.

Conditions and Exclusions from the scheme

Given this example, it is easy to see how instant asset write-offs can be beneficial to a business. However, it is important to note there are some conditions and exclusions from the scheme.

For a start, as previously mentioned all eligible assets must be installed and operational before the 30th June 2023 deadline. If your asset has been purchased before that date, but will not be operational after all, the asset will not be deemed eligible for the instant asset write-off scheme.

The scheme covers all new and second-hand assets that qualify as per the current criteria of depreciable assets. There are some exceptions though, which include assets that fall within the category of capital works, horticultural plants and intangible assets.

It may be a good idea to talk to your accountant, or the Australian Taxation Office directly.

See: 'How Instant Asset Write-Offs and Temporary Full Expensing Could Help Businesses Get Back on Track'

Can you sell the assets you bought under the scheme at a later time?

The short answer to this question is yes.

However, if you sell an asset you bought under the instant asset write-off scheme; you will have to include the sale price you received for it in your net taxable income for that particular financial year.

In addition, any insurance payments, or other types of reimbursements you receive must be also included in your net taxable income, should the asset you bought under the scheme later become destroyed or stolen.

Business and Personal Use Assets

It is important to also note that you can only claim the instant asset write-off for the percentage amount that your business uses the asset.

For example, if you are a small business owner who bought new equipment for your company, but also uses it for personal tasks 25% of the time, you are only allowed to write off 75% of the total asset cost under the scheme.

Therefore, if the new asset sets you back $40,000, you can only write off $32,000 for 80% of business use. You will not be able to write off the $8000 that is allocated to 20% of personal use.

Be mindful too that the total cost of the asset must be less than $150,000 when including both the business and personal percentage use.

Even if the business percentage usage amounts to $140,000, you will not be able to claim the write- off if the personal use is more than $11,000. As this combined total will unfortunately take you over the threshold.

Which assets should you purchase?

Before you go ahead and start making significant purchases for your business it is worth taking the time to really understand how they will impact your business.

Try and ensure your decision to take up the instant asset write-off scheme is based on an actual and current need that will benefit the growth of your company as per your business plan.

If for example, you had expansion plans in the pipeline that incorporated procuring new manufacturing equipment to make your business more productive but put them on hold during the pandemic, then the scheme can provide you with a great opportunity to reduce costs.

Be clear in what you are trying to achieve and only purchase assets that will assist you to meet your business targets, and not simply get you a tax deduction.

After all, the instant asset write-off scheme is a fantastic incentive and opportunity to not only invest in your business but also slash your taxable income - if you have thought it through.

But you really should take the time to understand both the short-term impact on your finances and general cash flow, prior to making any purchases.

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