Published on 25 Apr, 2023

How to Use The Instant Asset Write-Off for Small Business Owners

Written by:
Thomas S Phabmixay
General Manager

Page Contents

The temporary full expensing Instant Asset Write-Off incentive is one of the best tax-saving opportunities available to Australian businesses, but time is running out to take advantage of it. With the 30 June, 2023 deadline fast approaching, now is the time to act.

What is the Instant Asset Write-Off Incentive?

The instant asset write-off is a valuable tax-saving measure introduced by the Australian government, allowing eligible businesses to claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use. This incentive is available to businesses with an aggregated annual turnover of less than $10 million and applies to assets purchased and installed between 1 July 2023 and 30 June 2024. Eligible assets include both new and second-hand assets, such as office equipment, vehicles, and other business necessities.

For assets costing less than $20,000, small businesses can write off the entire cost in the year the asset is used or installed, rather than depreciating it over time. This immediate deduction provides significant cash flow benefits, allowing businesses to reinvest sooner. The incentive also applies to multiple assets, provided each asset’s cost is under the relevant threshold. It’s important to note that businesses must apply the simplified depreciation rules to qualify, and some exclusions, such as the car limit, may apply.

The eligibility criteria and thresholds for the instant asset write-off have changed over time. Businesses need to ensure they meet the current requirements and apply the relevant thresholds based on when the asset was purchased, first used, or installed. If an asset’s cost exceeds the applicable threshold, the asset must be placed in the small business depreciation pool.

Who is Eligible for the Instant Asset Write-Off?

To be eligible for the program, your business needs to have an aggregated annual turnover of less than $5 billion. The high turnover threshold means that almost every Australian business is included in the scheme. However, if your business’s aggregated turnover is less than $50 million, eligible second-hand assets can also be written off under the rules. Most Australian businesses can now immediately deduct the full business-related costs of all purchases of capital items.

Here are the list of eligible assets for Instant Asset Write-Off Incentive:

An image of a business owner holding a laptop with a thought bubble above their head, which reads: "Who is eligible for the Instant Asset Write-Off?" The text next to the image explains that businesses with an aggregated annual turnover of less than $5 billion are eligible, and those with a turnover of less than $50 million can also write off eligible second-hand assets.

Why is the Instant Asset Write-Off Important for Your Business?

The image shows a happy businesswoman looking at her laptop with dollar sign icons, indicating that she is earning or saving money. The text next to the image reads: "Benefits of Instant Asset Write-Off." This tax-saving strategy is important for businesses as it immediately deducts the cost of eligible assets, reducing taxable income and resulting in a lower tax bill. This provides significant cash flow benefits, which can be helpful for businesses looking to maximise their profits.

The Instant Asset Write-Off is an important tax-saving strategy for many businesses, as it can provide significant cash flow benefits. By immediately deducting the cost of eligible assets, you can reduce your taxable income, which means you’ll pay less tax. This can be particularly useful for businesses that have had a good financial year and are looking for ways to reduce their tax bill.

How can you make the most of the instant asset write-off incentive before the deadline on 30 June 2024?

As a business owner, you might be wondering how to take full advantage of the instant asset write-off program before the current deadline on 30 June 2024. Here are some key points to help you maximise this opportunity and reduce your tax liability:

Claim the deduction in the financial year it was used for business purposes

To qualify for the instant asset write-off, you must use the asset for business purposes and claim the deduction in the financial year it was first used or installed ready for use. If you plan to buy an asset before the deadline, ensure it is used or ready for use before 30 June 2024 to claim the deduction for the 2023–2024 financial year.

Buy and use the assets before the deadline

To be eligible for the instant asset write-off, you need to have the assets purchased and ready for use before the deadline. This means that you should plan your purchases and installations accordingly and avoid delays that may prevent you from qualifying for the deduction.

Keep accurate records of your purchases

It’s crucial to keep proper records of all purchases made under the instant asset write-off scheme, including receipts, invoices, and any other relevant documentation. By keeping accurate records, you can ensure that you’re claiming the correct amount and avoid any issues with the Australian Taxation Office (ATO) if you’re audited.

Consider buying second-hand assets

If you’re looking for a cost-effective way to acquire assets for your business, you may consider buying eligible second-hand assets. You can claim the full cost of these assets in the same year you buy them, as long as they’re used or installed and ready for use before 30 June , 2023. However, it’s important to ensure that the assets are in good condition and fit for purpose, and that you keep proper records of the purchase and use.

By following these tips, you can make the most of the instant asset write-off program and maximise your tax savings before the deadline. Don’t miss out on this opportunity to grow your business and improve your cash flow. Contact TMS today to learn more about how we can help you take advantage of this program and other tax incentives available to your business.

Borrowing Money for Assets and Claiming Instant Asset Write-Off

The image shows a business man speaking on the phone, holding a paper and sitting in front of his laptop. The text on the image reads: "Can you borrow money for assets and claim instant asset write-off?" The accompanying text explains that as a business owner, you can borrow money to buy assets and still claim the instant asset write-off. This means that even if you finance your assets, you may still be eligible for an immediate tax deduction, making it a viable option for businesses looking to invest in new assets.

As a business owner, you may be wondering whether you can borrow money to buy assets while still claiming the instant asset write-off. The answer is yes, you can. By obtaining financing for your business assets, you may still be eligible for an immediate tax deduction.

Financing Options for Business Assets

There are a variety of vehicle and equipment finance options available to help you purchase business assets. These include bank loans, equipment leases, and hire purchase agreements. If you need funding to take advantage of the temporary instant asset write-off incentive, financing could be an option to consider. However, it’s crucial to seek professional advice to determine the most suitable solution for your business.

Claiming the Instant Asset Write-Off for Financed Business Assets

You can claim the instant asset write-off for a financed business asset as long as your business meets the eligibility criteria. To be eligible, ensure your business has an aggregated annual turnover of less than $5 billion. If your turnover is less than $50 million, eligible second-hand assets can also be written off. By utilising financing, you can immediately deduct the full business-related costs of capital items. Remember, it’s always best to consult with a professional to confirm your eligibility and understand the specific requirements for your business.

Claiming GST Input Tax Credit for Financed Business Assets

If your business is registered for GST and the assets are for business purposes, you can claim the input tax credit for the GST portion of the purchase price. Remember to report the GST amount on your business activity statement. As with the instant asset write-off, we recommend seeking professional advice to ensure your business is compliant with GST regulations and properly claiming the input tax credit.

Maximising the Benefits of Instant Asset Write-Off and GST Input Tax Credit

To make the most of the instant asset write-off and GST input tax credit, follow these steps:

Confirm your business’s eligibility based on the aggregated annual turnover.
Ensure the assets are purchased for business use.
Deduct the full business-related cost of capital items.
Register your business for GST.
Report the GST amount on your business activity statement.

By following these guidelines and seeking professional advice, you can make the most of the instant asset write-off and GST input tax credit, while also providing your business with the necessary assets to grow and thrive. Financing can be an effective way to acquire business assets and enjoy the benefits of these tax incentives.

Real-Life Examples of the Instant Asset Write-Off in Action

How Adam Expanded His Delivery Business and Lowered Tax Liability Using the Instant Asset Write-Off

Case 1: Adam’s Delivery Business Pty Ltd

Adam is a hardworking entrepreneur who runs a small delivery business as the sole director of Delivery Business Pty Ltd. With an increasing demand for his services, Adam decides it’s time to expand his fleet by purchasing a new delivery van. He chooses a van that costs $44,000 (including GST) and plans to use it entirely for business purposes. Since his company’s aggregated turnover is less than $50 million annually, Adam’s business qualifies for the instant asset write-off.

Taking advantage of the instant asset write-off, Adam can claim an immediate tax deduction of $40,000 for the van in the financial year when the purchase is made, and the van is used or installed and ready for use. This deduction will reduce the company’s taxable income, lowering the amount of tax his business needs to pay for that financial year.

Operating as a company with a tax rate of 25%, the full deduction of $40,000 results in tax savings of $10,000. Let’s say Delivery Business Pty Ltd’s net profit is $50,000; with a tax rate of 25%, the tax liability would be $12,500.

By purchasing the van for $40,000 and claiming the instant asset write-off, Adam reduces the company’s taxable income to $10,000, and the tax payable becomes only $2,500. Moreover, since Delivery Business Pty Ltd is registered for GST and the van is used solely for business purposes, Adam can also claim an input tax credit of $4,000 for the GST portion of the van’s purchase price. This credit would be reported on the business activity statement (BAS) and effectively reduces the amount of GST Adam’s business needs to pay.

In conclusion, by utilising the instant asset write-off and input tax credit, Adam’s Delivery Business Pty Ltd can experience significant cash flow benefits, allowing him to further invest and grow his business.

The image shows a computation of how Adam, the sole director of Delivery Business Pty Ltd, expanded his delivery business and lowered his tax liability using the instant asset write-off. The computation shows that by claiming an immediate tax deduction of $40,000 for the purchase of a new delivery van, Adam reduced the company's taxable income and lowered the amount of tax his business needed to pay. With a tax rate of 25%, the full deduction resulted in tax savings of $10,000. This significant cash flow benefit allowed Adam to further invest and grow his business.

What’s the purchase threshold for the Instant Asset Write-Off?

The purchase threshold for the Instant Asset Write-Off in Australia is $150,000 per asset, the instant asset write-off expires on 30 June 2023. This threshold applies to each individual asset, allowing eligible businesses to claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.

Even if the combined asset costs of all the multiple assets you purchase exceed $150,000, you can still claim the instant asset write-off for each individual asset, as long as the cost of each asset is at or below the threshold.

Transforming Business Growth and Tax Savings: A Case Study of John and Jenny’s Restaurant Success with Proactive Tax Planning

John and Jenny own two restaurants under the JJ Family Trust, with John and Jenny being the only two beneficiaries in the trust. They are concerned about the significant profit they made this financial year, which is estimated to be around net profit $600,000. If they distribute the income 50/50, with taxable income of $300,000 each, the estimated tax payable would be $111,667 per person, the total tax payable $223,334.

They are looking for a way to reduce their tax liability while also investing in their business to make it more profitable. They work hard, seven days a week, but they still feel like they’re not getting ahead financially. They need to upgrade their kitchen equipment for both restaurants and are interested in finding a solution that benefits their business and helps save on taxes.

John and Jenny decide to purchase the following assets for their restaurants:

Commercial ovens costing $66,000 each (including GST) – one for each restaurant: $66,000 x 2 = $132,000

Industrial-grade dishwashers costing $16,500 each (including GST) – one for each restaurant: $16,500 x 2 = $33,000

Customised stainless steel benches and shelving costing $27,500 per restaurant (including GST): $27,500 x 2 = $55,000

High-end exhaust systems costing $44,000 per restaurant (including GST): $44,000 x 2 = $88,000

The total cost of all assets is $308,000 (including GST).

Claiming the Instant Asset Write-Off incentive:

Although the total cost of all assets exceeds $150,000, the purchase threshold for the Instant Asset Write-Off applies to each individual asset. In this case, every asset’s cost is below the $150,000 threshold, allowing the business to claim an immediate deduction for the full cost of each asset (net of GST) under the instant asset write-off.

This means that in the financial year when the assets are first used or installed ready for use, the business can claim a total tax deduction of $280,000 (net of GST) for the asset purchases. The GST amount of $28,000 can be claimed as an input tax credit if the trust is registered for GST.

By utilising the Instant Asset Write-Off incentive, John and Jenny can significantly reduce their tax liability while investing in the growth of their business. This allows them to upgrade their kitchen equipment, improve efficiency and profitability, and ultimately achieve their financial goals.

We did the tax planning calculation, after we put in $280,000 as a tax deduction in our tax plan calculation, the estimated income for the trust net profit is $320,000, if we distribute $160,000 each to them then tax payable is $47,467 each total tax payable is $94,934.

The total tax savings of $128,400 is a substantial amount, and we also advised John and Jenny about additional strategies that could further reduce their tax liability. For instance, we suggested setting up a corporate beneficiary to cap their tax rate at 30% and making the maximum superannuation contribution of $27,500 each.

They decided to contribute the maximum amount to their super funds to enhance their retirement savings, ultimately enabling a comfortable retirement. After implementing these strategies, their individual tax payable was reduced to $36,742, bringing the total tax payable to $73,484.

In comparison to a scenario without tax planning, their total tax savings amounted to $149,850.

These tax savings could be used for various purposes, such as:

Reducing their home loan,
Making a deposit for an investment property,
covering their children’s education expenses,
or reinvesting in their business.

John and Jenny were delighted with the results, which they achieved by proactively engaging our firm, TMS CPA Accountants for tax planning services. These significant tax savings of nearly $150,000 highlights the importance of taking action; otherwise, the money paid in taxes cannot be recovered. John and Jenny’s experience demonstrates how working hard without the right strategies may not yield the desired rewards.

Their other concern was that, while they could have a tax saving of $149,850 they didn’t have enough cash flow to pay for all those assets’ costs. We suggested they seek financing from a bank, which might enable them to obtain finance to purchase those assets and still be eligible for the instant asset write-off and GST input tax credit of $28,000 if they use the correct financing method like a bank loan, chattel mortgage, or hire purchase. We advised them to talk to a bank or loan broker.

John and Jenny approached their bank and discussed their financing options for purchasing the kitchen equipment. The bank suggested they consider a chattel mortgage or hire purchase, which would allow them to claim the Instant Asset Write-Off and GST input tax credit while spreading the cost of the equipment over a manageable repayment period. They decided to go with a chattel mortgage, which provided them with the best financing terms and met their cash flow requirements.

With the financing in place, John and Jenny proceeded with the purchase and installation of the new kitchen equipment for their restaurants. The upgrades resulted in increased efficiency, better quality food, and an improved customer experience, which in turn led to higher revenues for their business.

John and Jenny were thrilled with the results of the tax planning and financial strategies we provided. They were able to save a significant amount in taxes, invest in their business, and improve their financial position for the future. They also appreciated the ongoing support and advice we offered to help them navigate the complexities of tax and business finance. Their experience highlights the importance of proactive tax planning and working with a knowledgeable professional to achieve the best possible financial outcome for both business owners and their families.

As part of our ongoing services, we provided John and Jenny with a cash flow forecast to help them manage their cash flow better and ensure they have enough funds to cover their asset purchases and other business expenses.

This case demonstrates how working with TMS CPA accounting firm can provide valuable guidance and support for business owners like John and Jenny, helping them make informed decisions and take advantage of opportunities to grow and succeed. Our goal is to inspire other business owners to seek professional advice to maximise their financial potential and achieve their desired outcomes.

The image shows three different scenarios, with computations for the tax savings achieved through proactive tax planning. The first scenario is the "Base Scenario," which would result in tax payments of $223,334. The second scenario is the "Instant Asset Write-Off," which would result in tax savings of $128,400. The third scenario is "Super Contribution," which would result in tax savings of $149,850 compared to the base scenario.

However, it’s essential to recognise that every individual’s circumstances are different, and the strategies implemented in John and Jenny’s case may not be suitable for everyone. The Instant Asset Write-Off, for instance, might not be the right fit for all businesses. We urge you to prioritise investment returns and not solely focus on tax reduction. Tax savings are only beneficial if the investment or expense generates a greater return. For example, investing $100 with the expectation of a $1,000 return is a smart approach, rather than merely considering the tax deduction.

We want to emphasise that making informed, smart choices about how to use money is crucial for growing your wealth or preventing financial setbacks. As responsible accountants, our priority is to help our clients make the best decisions based on their unique circumstances and objectives. It is essential to carefully consider your business goals and ensure that any asset purchases align with those goals before taking advantage of the Instant Asset Write-Off or other tax-saving strategies. Remember, the key is to make decisions that will positively impact your business in the long run, rather than just focusing on short-term tax deductions.

Get Professional Advice from TMS Financials

At TMS Financials, we can help you determine if the Instant Asset Write-Off is right for your business. We’ll work with you to assess your personal circumstances and advise you on the best course of action. Our team of experienced accountants can help you plan your cash flow, assess the rate of return on your investment, and ensure you meet all the eligibility criteria for the Instant asset write-off incentive.

Don’t wait until it’s too late to take advantage of this valuable tax break free financial health review now.

Book a free accountant consultation with TMS CPA Accountants your specialists in Sydney Australia.

Disclaimer

This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.

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