What you can and can’t use it for.

The ATO’s $20K instant asset write off for ‘small businesses’ is coming to a close on June 30 this year. That means we’re also more likely to see all sorts of misleading advertising trying to get you to spend your hard earned business dollars.

But before you run out and spend it, we thought you might appreciate a discussion of what can you use it for, what should you use it for; and frankly what is just a bald faced marketing lie.

Who can take advantage of instant asset write-off?

Any small business, defined as an individual, partnership, trust or company with an annual turnover less than $2 million.

What can you spend it on?

This write-off applies to depreciable assets. What’s that? An asset that has a ‘fixed life’ or in other words is deemed to only last for a period of time, such as a vehicle, plant, equipment and computer hardware. For example:

• You might refit your office, your retail shop or your restaurant. Your fittings like chairs, desks, counters, bookcases, wall hangings (not ‘art’ per se – especially if it’s an appreciating asset) etc all count.
• Any plant, equipment, tools of trade or machinery that you use in order to produce saleable work (products or services) count too
• And IT hardware like computers, printers, scanners, physical servers (that means based on your premises, not in the cloud – which are generally only rented).
• Sheds and storage containers for storing equipment also qualify
• As do motor vehicles, trucks, tractors, etc – although they must have a less than $20K purchase price.

What can’t you spend it on?

You can’t claim depreciating asset status on anything that appreciates such as land, art, stock (as in stocks and bonds), wines, gold, etc. And you can’t claim computer software, trading stock or intangible assets (goodwill) either. Anything with an individual sticker price of greater than $20K (+GST if you’re registered for it).

What’s a bald faced lie?

One of our clients recently received an email from a web domain reseller (who shall remain nameless). The email suggested that they take advantage of the tax break by spending up on building a new website, website hosting services (rented), paying for search engine optimisation services to be found online, etc. This particular company were offering 10 years of prepaid services.

And whilst I can see that a new website, might, MIGHT, make it in as a depreciable asset – although we’d generally count its creation as a marketing expense which is fully deductible in the year its paid for; anything rented, especially with a 10 year prepayment, is likely to be knocked back by the ATO. When it comes to prepayments, they’re allowed, but generally only 12 months in advance – not 10 years.

Are there any catches?

As with all things ATO, there are things you need to be aware of.

• Anything you buy must be used, installed  or working by 30 June. IN other words don’t sign up for major refit/retool late June or buy a car that’s ‘delivered’ in July – it won’t be counted.
• If your asset is part business and part personal, you’ll want to double check if the GST status pushes the purchase over the $20K maximum. For example if you’re claiming a 100% work vehicle you can purchase up to $20K + GST.  However, if you purchase a vehicle for $30K + GST that is 75% business:25%personal (by log-book) the vehicle will actually have a purchase price of $22,500 (net of GST) which puts it over the $20K threshold.
• If you’re not registered for GST make sure the $20K price includes GST, otherwise you’ll be over the $20K limit.
• And of course, if your business isn’t yet making a taxable profit, you’re probably best waiting until you are before claiming deductions on tax.
• Also, make sure that you qualify. If you’re part of a ‘group of companies’ with a turnover in excess of $2M you’re not likely to qualify.

What ‘should’ you spend it on?

Now, as with all things tax deductible, it can be very tempting to spend your money. It feels like a ‘discount’ or a freebie – if I don’t spend it, I’ll lose it. But that’s a bit of a nil-sum game. Yes, you’ll have to pay tax on that money if you don’t spend it. Just ask yourself if you’d still buy this thing if you had to depreciate it, because in truth that’s all you’re doing – pulling your depreciation forward. If your answer is yes, great! If not, you’re probably best keeping your cash.

Also, if you’re contemplating taking on debt to take advantage of this, think carefully and seek professional advice. Interest rates that have been at historic lows are now, once again on the rise. Taking on thousands of dollars in debt that will take years, maybe even decades to pay off, to save some tax right now might not be worth the immediate gratification.

When used wisely, this asset write-off can be of great benefit for your business.  However, if you’re seriously considering making not absolutely essential purchases for your business with the instant asset write off, you probably want to seek advice from your accountant. Of course, if you’d like to talk to us, we’d love to talk you through that whilst taking your tax and longer term financial position into account. You can call us on 6023 1700 or get in touch via the form below.