While some businesses have been facing uncertain and difficult times during the COVID-19 crisis, others have been doing well and are now seeking tax planning advice to legitimately reduce their taxable income for the 2020 year.
One of the measures introduced by government to stimulate the economy in early March of this year is the enhancement of the instant asset write-off on new and second-hand assets. It was announced that businesses with an aggregated turnover of less than $500 million are now eligible for a full income tax deduction on eligible business assets purchased and installed ready for use by 30 June 2020. Timing is critical with this deduction. And on 9 June 2020 it was announced that this measure would be extended to eligible assets installed and ready for use by 31 December 2020. While this extension of time is still to be fully ratified, it gives businesses needed time to plan and make the most of these measures.
The enhanced tax deduction is good news for taxpayers that were planning on undertaking equipment upgrades in the near future. It is also worth noting that taxpayers can claim the instant asset write off for multiple assets, provided each individual asset meets the criteria for the deduction.
While these measures are welcomed by taxpayers, there are some limitations and points of caution:
- Motor vehicles are deductible up to the depreciation cost limit only ($57,581 for the 2020 financial year).
- Some assets are excluded from these measures including horticultural plants, software allocated to a software development pool, and capital works deductions (for example buildings).
- The taxpayer is eligible for the deduction from the time the asset is installed and available for use. (Many major items of plant and equipment have a lead time which may result in the deduction being unavailable for the 2020 financial year.)
- The tax deduction is only of benefit in the current financial year when there is taxable income at a level where tax is payable. Many businesses have experienced significant downturn and may not benefit fully from this immediate write off in the 2020 financial year. However, losses may be carried forward to offset taxable income in future financial years.
- Cash flow remains vital for businesses given the uncertainty in the current economy. Businesses must have the cash flow to pay for the assets, or the means to obtain and service finance arrangements.
- Small businesses that have chosen to apply the simplified depreciation rules must use the instant asset write-off on assets that meet the criteria.
And don’t forget that measures introduced years ago still apply for assets purchased prior to 12 March 2020. Under these measures, businesses with an aggregated turnover of less than $50 million can access an immediate deduction for assets purchased at a cost less than $30,000.
If in doubt about the benefits to your business of any of the measures discussed above, please contact your local Accru advisor for further assistance.
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