What does the Government announcement of the increased instant asset write off mean for the cash flow of your business? Let’s take a look at the summary of the concession and a practical example to explain the cash flow effect.
Threshold Summary
From 7.30pm 2 April 2019 (budget night) Small Businesses with turnover of less than $10 million are able to deduct fully the cost of fixed assets costing under $30,000 (excluding GST). This increase in threshold from the previous threshold of $20,000 extends until 30 June 2020. Because the threshold changed a few times in the 30 June 2019 financial year there are a few dates you need to know:
- From 1 July 2018 to 28 January 2019: Assets under $20,000 can be deducted outright
- From 29 January to 7.30pm 2 April 2019: Assets under $25,000 can be deducted outright
- From 7.30pm 2 April 2019 to 30 June 2019: Assets under $30,000 can be deducted outright
Key tips
- The threshold does not include GST, so if your asset costs $31,900 including GST, that is $29,000 before GST and can be deducted
- The threshold is for each asset, so you can deduct multiple assets as long as each one is under $30,000
- If you have existing assets in a Small Business General Pool and the closing balance of that pool is under the threshold at the end of the year (before applying depreciation for the year) you can write off the balance of the pool and get a tax deduction in the current year.
- Tax planning opportunity! If you are considering a major asset purchase over the $30,000 threshold and your current Small Business General pool is close to or under the threshold in June 2019, you should contact your accountant to see if you should delay the purchase until after 30 June so you can deduct the old balance of the pool before the new asset purchase puts it over the threshold.
Example 1: Asset purchase
You have decided May 2019 is the time to buy a new motor vehicle in your company and want to know how much will it actually cost you in cash out of your business. Assuming the car costs $31,900 including GST, you pay cash and it is used 100% for business purposes.
In summary, the cost including GST is $31,900, you can claim $2,900 on your next BAS and you get a reduction in company tax of $7,975. This is a total cash outflow of $21,025 to purchase the car outright in year 1.
Of course, you can still finance your asset over several years and receive the $10,875 GST and tax deduction cashflow benefit in year one. Depending on your finance package this may even be more than the total monthly finance repayments in year one.
Example 2: Write off General Pool balance
You have a good accountant and they check that your small business general asset pool is less than $25,000 at the end of June 2019. You are able to write off the whole balance of the pool and the old assets in the June 2019 tax year. In the case of a company this would yield a reduction in tax of $6,875 (for an individual the tax effect will be at your marginal tax rate).
As always, talk to us before making your asset purchase to confirm the best way to structure and fund your deal, so we can ensure you get the biggest benefit you can from the ever-changing small business tax laws. The information contained in this article is for general purposes only and you should seek expert advice regarding your specific circumstances.
Feel free to contact us if you would like any further advice in this area.