Guidance has been issued by the Tax Office for small businesses on the new $20,000 small business instant asset write-off measures announced in the Government’s 2015 budget.
Although not yet legislated, the measure applies from the time of its public announcement, 7.30pm AEST on 12 May 2015. With the end of the financial year just around the corner, the announcement leaves time for a small business to achieve a tax reduction for the 2014-15 year.
As announced, this new measure operates in the same way as the current concessions for small business, by increasing the existing $1,000 deduction limit to $20,000. This is a substantially more generous limit than the recent Labor Government’s $6,500 allowance measures which were in place from 1 July 2012 to 31 December 2013.
The same principles will also apply to the pooling of assets which cost above the $20,000 deduction limit – they will be pooled and depreciated at a rate of 15 per cent in the first year and 30 per cent each year thereafter. This also means that a year-end pool balance which is less than the deduction limit of $20,000 (previously $1,000) can be written off with a full deduction claimed.
Some other points about the new measures to note:
- Eligibility for the deduction is limited to small business entities – the definition of which requires carrying on business with an aggregated annual turnover of less than $2 million. The turnover test for the current year can be met if aggregated turnover:
- was less than $2 million in the previous income year; OR
- is estimated to be less than $2 million for the current year (provided that your aggregated turnover was less than $2 million for one of the two previous income years); OR
- is actually less than $2 million at the end of the current year.
The aggregation rules require that the turnovers of businesses which are affiliated or connected must be added together to determine whether the $2 million limit is breached.
- The $20,000 deduction limit is in place until 30 June 2017. After that the limit will go back to the previous level of $1,000.
- The $20,000 limit applies for each eligible asset; i.e. there is no limit on the total amount claimed by a taxpayer.
- The existing rules for qualifying assets will apply i.e. the deduction will be available in the income year in which the asset is first used or installed ready for use for a taxable purpose.
- The “taxable purpose” requirement is key. What the government clearly has in mind are tools, machines, equipment and tradies’ utes, and the Tax Office has been quick to point out that “integrity measures” will be in place. So any plans to make an unusual kind of claim should be risk-assessed in that light, bearing mind that no draft legislation has as yet been released.
The Tax Office will be concerned about the integrity of claims. Factors may include:
- Falsely representing that annual turnover is under $2 million
- Breaking down one large purchase into lots of less than $20,000 purchases
- Bringing pre-Budget equipment purchase contracts into the post-Budget eligibility period
- False invoicing
- Quoting a false Australian Business Number
- Non-business taxpayers misrepresenting their eligibility for an Australian Business Number
- Buying equipment for personal or home use, not for business use
- Private buyers giving funds to small business taxpayers, asking them to buy equipment on their behalf
- Purchasing equipment from relatives, associates or related entities.
Most kinds of new or second-hand assets are included, including motor vehicles, but some are not. Exclusions include assets which are subject to specific tax depreciation rules, including:
- Horticultural plants
- Capital works
- Assets allocated to a low-value or software depreciation pools
- Primary production assets (you can choose the specific rules or the accelerated depreciation rules)
- Assets leased out to another party on a depreciating asset lease.
5 Year Lock-out Rule Suspension
A further concession bundled with the new rules is the relaxation of the 5 year “lock-out”: Taxpayers who have elected out of the simplified depreciation concessions will be allowed back in to the $20,000 scheme.