Before you commit to spend any money, ask yourself these 5 questions.
With the dust now settling on this year’s federal Budget, it’s worth asking whether the temporary increase in the accelerated depreciation threshold to less than $20,000 is worth the hype.
The short answer is yes, but my suggestion to small business is to be cautious.
While there are quite a number of small business initiatives in this year’s budget, the centerpiece has to be the temporary increase in the instant asset write-off threshold for small businesses from $1,000 to less than $20,000.
The increase in the threshold should see an increase in investment by small businesses which, if done wisely, should help many of them grow and possibly create jobs, both directly and indirectly.
While tax should not be a driver of business decisions, this change will bring forward cash flow, which may help what could be a marginal investment become an effective one.
We are already seeing a number of claims about how businesses can access the instant asset write-off and we are likely to see others. I can only encourage taxpayers to be skeptical of claims that sound to good to be true, because they are.
This is not “free money”, like the $900 given out to many taxpayers at the start of the global financial crisis. This is a targeted measure designed to encourage small businesses to make investments in assets that will help them make more money.
Any decision small business owners make to take advantage of this change must first and foremost make sense commercially; that is, does the investment in the asset help your business grow?
The Australian Government proposes to temporarily increase the threshold below which a small business can claim an immediate deduction for the cost of an asset it first starts to use, or have installed ready for use for a taxable purpose, from $1,000 to $20,000.
The increased threshold will be available between 12 May 2015 and 30 June 2017. For those businesses that are registered for the GST, the threshold is calculated on a GST exclusive basis.
Related: What the 2015 Budget means for your small business
If the business is not registered for the GST, the threshold is calculated on a GST inclusive basis. It applies to both new and used assets.
The potential pitfalls
- Regardless of what you hear over the next few years, spending upwards of $20,000 is a considerable investment by a small business and there should always be sound business reasons for spending such an amount.
Before making a decision about purchasing an asset, ask yourself:
- will the asset help me grow my business?
- what will be the return on investment?
- do I have the money to make the investment?
- is this investment the best use of my money?
- Does my business really need the asset?
- Simply having an ABN does not automatically qualify you for this incentive. You must be running a business and satisfy the small business entity test. Additionally, the asset itself must have a relevant connection to the running of your business and be held for the purpose of producing assessable income.
- You can claim the deduction to the extent the asset is used for tax deductible purposes. That is, if you use the asset partly for a private purpose, you must apportion your deduction accordingly.
- A small number of assets are not eligible for accelerated depreciation, even where they cost less than $20,000. These assets include:
- Horticultural plants
- Capital works
- Assets allocated to a low-value or software depreciation pool
- Primary production assets
- Assets leased out to another party on a depreciating asset lease
In most cases, specific depreciation rules apply to these assets.
- Small businesses will need to keep records of their purchases.
- The ATO has warned that if small businesses exhibit behaviours that indicate a high level of risk, they can expect a higher level of scrutiny from the ATO.
- You must meet the definition of a small business
There have been suggestions that larger businesses could simply restructure to get under the $2 million threshold to qualify. The law is written to prevent such potential abuse so before you go down the restructuring path, seek advice from a CPA registered tax agent.
To meet the definition of a small business, you need to operate a business that has an aggregated annual turnover of less than $2 million exclusive of GST. Generally, aggregated turnover is the annual turnover of your business plus the annual turnover of any business you are connected with or that is your affiliate.
This means that if you carry on multiple businesses, the aggregated annual turnover includes all of the ordinary income you derive in carrying on each of those multiple businesses. Income such as your salary and wages or dividend and interest income not related to the business being carried on, are omitted from the annual turnover calculation.
Capital gains, non-cash benefits, trust distributions, partnership distributions derived in the course of carrying on a business will also be excluded from the calculation of your business’s annual turnover.
- You must be in business
Just because you have an ABN does not mean you qualify for the instant asset write off. Your operations must meet the definition of a business. The following may be taken into account to determine if you are carrying on a business:
- Do you carry on your activity for commercial reasons and in a commercially viable manner?
- Do you have the purpose of profit as well as the prospect of profit?
- Is there repetition and regularity to your activity?
- Is the way you operate consistent with other businesses in your industry?
- What is the size, scale or permanency of your activity?
- Is your activity planned, organised and carried on in a business-like manner?
- If you are still setting up or preparing to go into business, you might not yet have started the business.
Small businesses that purchase assets valued at $20,000 or more will continue to place such assets in the small business depreciation pool and depreciate at 15 per cent in the first year and 30 per cent each income year thereafter.
The Government will suspend the "lock-out” laws that prevent small business from re-entering the simplified depreciation regime for five years if they opt out until 30 June 2017.
A qualifying business can also claim an outright deduction for expenditure included in the second element of the cost of the asset (ie improvements to the asset), provided the expenditure is less than the threshold amount and the asset was first used or installed ready for use in an earlier income year.If in doubt, seek guidance from a CPA registered tax agent. Also stay current with guidance from the ATO.
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