Accelerated Depreciation Write Off

The accelerated depreciation write-off for assets up to $20,000 acquired by small businesses was announced in the May 2015 budget. The write off threshold was previously $1,000 and the concession only applies to businesses in 2015/16 with an aggregate annual turnover of less than $2 million. However, as a boost for small businesses, the Government has extended access to a number of small business tax concessions by increasing the annual turnover eligibility threshold from $2m to $10m. These measures apply from July 1, 2016.

From a tax planning perspective some business owners may look at the timing of their expenditure to maximise the tax benefits of the instant write off.

On face value it seems like a generous tax concession but there are a number of conditions you need to satisfy. Firstly, the asset must be used in the business for income-producing purposes. The Tax Office have stated they will monitor usage to detect ‘rorts’ so once you lodge your tax return you might get a ‘please explain’ letter from the ATO asking for more details.

The $20,000 threshold only applies to assets that were first acquired at or after 7:30 pm (AEST) on 12 May 2015 and they were first used (or installed ready for use) on or before 30 June 2017. From 1 July 2017, the threshold will revert back to $1,000. The increased threshold is available to all small businesses (including those who previously opted out of the simplified depreciation rules). Depreciating assets that do not meet these timing requirements would continue to be subject to the $1,000 threshold.

Key features of the Write-Off Rules

  • The asset can be new or second-hand.
  • The deduction is claimed in the income year in which the asset is first used or installed ready for use.
  • The write-off is for the ‘taxable purpose proportion’ of the asset which is the proportion of the asset's use in an income year for producing assessable income.
  • The requirement that an asset be ‘first acquired’ at a particular time is not a feature of the current regulations and limits access to the increased threshold to a small business entity's "new" assets. Don't be confused, the acquired asset can be new or second-hand, but it must be a ‘new’ asset of the business. The ‘first acquired’ rule is designed to disqualify assets acquired at an earlier time, temporarily disposed of, and then re-acquired at or after the 7:30 pm start time.
  • Depreciating assets that are first acquired prior to the 7:30 pm start time would continue to be subject to the existing $1,000 threshold, irrespective of when they are first used or installed ready for use. The existing $1,000 threshold would also apply to depreciating assets that are first acquired from the 7:30 pm start time but were not first used or installed ready for use on or before 30 June 2017.
  • Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2017.
  • Small business entities can claim a deduction for an amount included in the second element of the cost of a depreciating asset (e.g. an amount spent on improving or transporting a depreciating asset) that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7:30 pm (AEST) on 12 May 2015, and on or before 30 June 2017. Costs that are incurred outside of these times would continue to be subject to the $1,000 threshold.
  • Primary Producers are also eligible for accelerated depreciation on the following items acquired after 12 May 2015:
    • Immediate deduction for the cost of Fencing and Water Facilities such as dams, tanks, bores, irrigation channels pumps, water towers and windmills.
    • The cost of Fodder Storage assets such as silos and tanks used to store grain and other animal feed can be depreciated over 3 years.

The government has warned that the $20,000 accelerated depreciation concession is not intended for assets that are acquired under ‘artificial or contrived arrangements’. The government says the general anti-avoidance provisions in the tax law are intended to capture arrangements where a number of related small business entities sell their assets to one another in order to satisfy the ‘first acquired’ condition and write off the full value of those assets under the increased threshold.

WARNING : While the $20,000 accelerated depreciation incentive sounds attractive to small business owners, spending up to $20,000 on an asset to simply get a tax deduction may not be prudent. As detailed above, there are some specific rules around this concession so we urge you to seek professional advice before committing to a major asset purchase.

Other 2016 Year End Tax Planning Opportunities

Disclaimer: This newsletter contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.