Use it before you lose it – small business instant asset write-offs!
“Use it or lose it” is the question we are all asking ourselves at the moment, as we wait in anticipation to see if the current small business instant asset write-offs will be scrapped under the new government.
Currently when a small business purchases an asset below $6,500 it can be written-off in the year of purchase. If your business is registered for GST the $6,500 is GST exclusive, and if not, then the $6,500 is GST inclusive.
To be able to access this generous write-off, your small business needs to be classed as a business by the Tax Office with an aggregated annual turnover of less than $2 million.
So what is an asset and what does an instant write-off mean?
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include such items as computers, electric tools, furniture and motor vehicles.
Normally depreciating assets are written-off over their expected life, which for some assets can be as long as 40 years. Therefore, instead of claiming a tax deduction in the year of purchase like you would with a normal business expense, you claim the deduction spread out over the number of years the Tax Office thinks your asset will last.
For example, Sally purchased a new Computer for her online clothing store. The Computer cost $2,000. Based on depreciation rates for computers, Sally’s computer has a life expectancy of 4 years. Therefore, she would claim a tax deduction of $500 over the next 4 years.
However, with the small business instant asset write-off, Sally can claim the whole $2,000 as an outright tax deduction in the year of purchase because it cost less than $6,500.
How is the best way to take advantage of the immediate write-off rules?
If your business is expecting a higher than normal profit in any particular year, purchasing new assets for your business costing less than $6,500 can bring your taxable income down significantly.
Small business owners should, however, act with caution. Before you run out and empty your bank account, you need to check the cash flow position of your business. If you don’t have sufficient cash reserves to buy new assets, then you could end up landing yourself in hot water. Never purchase an asset just to obtain a tax benefit. Asset purchases are a management decision and should be made taking into account a number of different factors so you can achieve the best possible outcome for all areas of your business.
Lastly, the current government is wanting to scrap the small business instant asset write-off. This MAY potentially be your last year to take advantage of the concessions. I suggest keeping in close contact with your accountant over the next 6 months so they can inform you of any new developments as they happen.
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