EXPERT ADVICE: INSTANT ASSET WRITE-OFF, BACKING BUSINESS INVESTMENT
The federal government has recently announced a significant suite of business stimulus measures, comprising several initiatives and programs aimed at keeping businesses operating during COVID-19.
In part two of this blog series, we spoke with senior accountant and financial advisor, Haydn Stewart, the Executive Director of Melbourne-based advisory firm, Trident Financial Group.
In Part 1 of this series, Haydn took us through the JobKeeper and boosting cash flow stimulus measures. Here in this article, Haydn takes us through the Instant-Asset Write-Off and the Backing Business Investment (accelerated depreciation).
Looking to invest in a truck and make use of these government stimulus package measures? We’ve got the calculations sorted—check our example out here.
Hi Haydn, could you give us a broad overview of the Instant Asset Write-Off, and some of the benefits it can provide for businesses?
Sure. Essentially, this measure means that businesses can immediately write off the cost of an asset, or in some cases claim up to a 100 per cent deduction for assets bought up to the value of $150,000, which is great.
It means businesses can get a tax deduction immediately, paying less tax and lowering out-of-pocket expenses.
The idea behind the Instant Asset Write-Off is to encourage businesses to spend cash in order to stimulate the economy. So, if my business was planning to buy a new piece of machinery or some new trucks for example, we’d be more likely to do it now to get the full tax deduction, and we’d stimulate the economy by doing so.
When would businesses actually see the financial benefits of the Instant Asset Write-Off?
This measure runs from the 12th March 2020 through to the 31st December 2020.
For an asset to be claimed as a tax deduction, it is required to be installed and ready to use prior to the 31st December 2020. In terms of when the actual benefit arises (assuming you are on a regular yearly tax schedule), it will be realised when you lodge your tax return in the form of a reduced tax bill.
Are there any restrictions on the type of asset you can claim? What about assets that might be used in a personal capacity, like a light truck you might drive on the weekend, as well as for work?
Great question. Yes there are a few restrictions around the type of asset you can claim.
Specifically, it has to be what we call a capital allowances asset, so you can’t be using the asset on any capital work. So, for building upgrades for example, that’s a no-no. You can’t deduct costs for any improvements to a building.
You mentioned dual use vehicles, and this is an interesting point. There are depreciation limits on cars for example. If you go out and buy a new business car worth $100,000, you can only claim up to the depreciation limit of $57,581 for the 2019-2020 income tax year. For other mixed purpose vehicles, like a truck over one tonne, they are eligible and don’t fall into the car category as they’re a trade vehicle.
But where there is a personal component—say you also use your truck on the weekend for personal use—the answer depends on how often you use it in a way that relates to your business. If you calculate the truck is used 80 per cent of the time for business, in that case you would claim 80 per cent of the cost.
If you’re claiming 100 per cent of a vehicle for a company or a trust, any private use will be subject to fringe benefits tax.
It can get a little complicated, so it’s best to have a good look at the ATO guidelines for vehicles. But suffice to say, to the extent a vehicle is used for business, you could claim a tax deduction on that portion.
In your experience, do you think the Instant Asset Write-Off is most beneficial for those ‘cash-rich’ businesses, with the capital to invest?
I would say that is correct, yes. It does limit the amount of people who can take it up, and in the current uncertain market, businesses will be looking closely at where and where they spend their cash.
My recommendation would be to consider this measure only if (a) you had already planned to buy the asset as some stage in the future; and (b) that you’ve done your cash flow projections and you know you can afford it with in light of where the market is heading.
But as with anything finance, you can finance or lease to get the same effect, so you can still get the immediate tax deduction if you need it.
Moving onto the accelerated depreciation measure now, also called the Backing Business Investment—can you tell us how it works and who is eligible?
This one is basically for businesses with an aggregated turnover less than $500 million for the 2019-2020- and 2020-2021-income years, who have purchased an asset that is too large to fall under the Instant Asset Write-Off cap of $150,000.
Under the Backing Business Investment you can claim a 50 per cent deduction on the cost of an asset up-front.
Say for example, you buy a million dollar piece of plant or capital equipment for your manufacturing business, with the accelerated depreciation measure you can claim $500,00 straight away, and then the remaining balance is depreciated however the business would normally depreciate an asset.
It’s great for large capital investments as you can claim a large portion of it upfront, and a good incentive for businesses to invest now rather than hold on to their cash.
Can any business claim the same 50 per cent rate of deduction, no matter how much the cost of the asset varies?
In terms of allowable assets, it’s similar to the Instant Asset Write-Off—it’s only for your capital allowance assets, and additionally for this measure, it also needs to be new assets that you’re buying (unless it’s being held in stock by another entity).
You can’t apply this measure to secondhand assets, so it’s really aimed at those larger investments like heavy-duty trucks or plant equipment that surpass the $150,000 threshold.
You also need to make sure you talk to your tax accountant to ensure you’re getting the right deduction in the correct year. Under the Backing Business Investment, you have to use or install the asset ready to use between 12th March 2020 and 30th June 2021.
Are there any issues around accelerated deprecation that businesses should be aware of, or is it pretty straightforward?
It is straightforward, but there are a few things we need to watch out for.
With the accelerated depreciation measure, you’re buying a large piece of equipment one year, so in that year you’re going to see a very large depreciation deduction and a smaller profit margin.
On the flip side, we might see a much larger profit the next year. From a tax planning perspective, we usually try to spread the tax load across years to make the overall tax bill lower, so you may end up not wanting to claim the whole 50 per cent amount of the asset all in that one year.
Down the track, you may also end up selling the asset, which could have further tax implications. If you’ve written down the value of the asset quite low (because of the immediate 50 per cent write-off) and you end up selling it at quite a good figure, it could lead to a taxable profit margin on the sale—in other words a tax bill for the sale. Just something to bear in mind for the longer term.
Want to see how stimulus package measures such as the increased Instant Asset Write-Off threshold and Backing Business Investment look like when translated to real-world truck purchases? We’ve got you sorted. Check out an example here.