In the 2020-2021 Australian Federal Budget, they announced an increase in the instant asset write-off by removing the $30,000 per asset limit.
The threshold is now $150,000 per asset.
This is excellent news for businesses wanting a quick tax deduction before June 30.
The asset write off was designed for one year, but the Government extended this in the budget by a year to June 30, 2023, due to the impacts of COVID.
If you have a small business and want to buy some machinery or perhaps add a car to your fleet or maybe buy the ute you have been putting off, this is a fantastic opportunity to take full advantage of this tax break.
But, for many small business owners getting their head around this and fully understanding this can be not easy; we will break this down for you to decide about buying your next asset.
What’s the instant asset write-off scheme?
The instant asset write-off scheme enables you to write off the entire asset purchases in the financial year.
It began in 2011 with a meagre instant asset write-off of $1000 but has increased over the years to a whopping $150,000. It has also expanded to include those massive businesses with an annual turnover of up to $5 billion. So this scheme encompasses most business in Australia.
The advantage for Aussie businesses is that previously they could only write off a portion of their asset purchase over the next couple of years. But and here’s the main advantage; writing the asset off in one year enables you to make a significant tax deduction.
How does the instant asset write-off work for Australian business in 2021?
With the instant asset write-off changes made by the Federal Government in 2020, you can claim a deduction on your Annual business tax return for the total cost of an asset in the year you purchase it or have it installed. So, if you buy a new car this financial year for $45,000, you can deduct that entire amount from your tax return.
The asset write off includes:
- Tools and machinery are perfect for tradies who want to scale up their business or replace old tools.
- IT hardware – computers, laptops, monitors, iPhones, printers – ideal for companies in the IT space.
- Machinery and equipment
- Office and shop furniture and fittings – great for retailers
- Kitchen equipment – restaurants should take advantage of this tax break
- Motor vehicles
You can immediately write off so many other categories and assets that it encompasses every asset acquisition within your business. So, if you have made any extra income over the past year, you don’t have to worry about depreciating this asset over an extended period; it can happen immediately—a great way to reduce your taxable income.
Example of how the instant asset write-off works.
Michael owns a roofing business and wants to upgrade his gutter installation machine. On February 15 2021, he buys a gutter making machine for $50,000, exclusive of GST, and picks it up on April 10 2021.
Because he runs a small business, his company tax rate is 27.5%, so he’ll reduce his tax bill for this financial year by $13,750.
Read the fine print.
If you want to acquire an asset and use the instant asset write off in 2021, there are a few factors that you must consider.
The first thing you need to do is discuss this with your accountant. But, to help you make the right decision, here are a few points to consider.
- You can buy a new or used asset.
- You must deduct the asset you’ve used or installed in the financial year.
- If you purchase an asset that’s used, say 60% for your business and 40% private, you can only deduct the business component
- There’s no limit to how many assets you can purchase.
Of course, always speak with your accountant before making a decision to make sure you’re doing what’s best for you and your business.
An important point to note is that you’ll need to have the funds ready to purchase the equipment. In some cases, you may not have these funds, and this is where Sparrow Loans can help you buy that piece of machinery, car or equipment. The cost of the interest is partially offset by the savings from the tax write-off and is a further expense that is tax-deductible. So, if your thinking about making an asset purchase, have equity within your property but don’t have the money, please give us a call here at Sparrow Loans.