The Economic Stimulus Package: Instant asset write-off threshold increase explained

A key part of the government’s economic response to the coronavirus is to support business investment and cashflow by increasing the instant asset write off threshold and eligibility rules.

So what is the instant asset write-off (IAW) and how can it help your business? 

Claiming an immediate deduction

Put simply, the IAW provisions allow your business to claim an immediate tax deduction for the full cost of a business asset you buy. Normal depreciation requires you to deduct the cost against your business profits over several tax years. 

Under the new rules, you can claim a tax deduction in the same financial year you purchase new or second-hand plant and equipment costing under $150,000. 

The IAW is not a cash refund. You don’t get the amount you spend back from the ATO, but instead get the advantage of bringing forward a tax deduction you would normally receive over several tax years. 

A simple example is a plumber who buys a new $16,000 trailer for his company. Using the IAW he can claim an immediate tax deduction of $16,000, which in turn reduces his business profit so he pays less tax. 

Rules for the IAW

To claim the IAW, the total cost of the asset must be under the relevant threshold. This includes the cost of having the asset installed and ready for use. 

Each asset must be under the threshold, but there’s no limit to the total amount your business can claim. 

If your business is registered for GST, the IAW threshold excludes GST. Otherwise, the threshold includes GST. 

From 12 March 2020, businesses with an aggregate turnover of up to $500 million are eligible for the IAW, up from $50 million previously. 

Eligible assets for the IAW

What you can purchase ranges from furniture through to computers and IT equipment, that may be required to enable staff to work remotely. 

Industry specific kit such as new tools for tradies, or POS devices and security systems for a retail store also meet the rules. 

Although the IAW is generous, assets such as horticultural plants and in house software are ineligible. 

Watch out for the traps

To claim the deduction, your new asset must be fully installed and ready for use before the end of the financial year in which you lodge your claim. 

If you are a sole trader, you also need to apportion any private use. For example, if you purchase a new car and use it for business purposes 70 per cent of the time, you can only claim 70 per cent of the cost. 

You are not permitted to reduce the asset’s price with a trade-in or personal use apportionment to get under the current $150,000 threshold. For example, if your new equipment costs $210,000 and business use is 70 per cent (leaving a claimable amount of $147,000), you can’t claim the IAW as the original cost is still over the threshold. 

If your business is structured as a partnership, it’s important to remember the partnership owns the asset – not the individual partners – so there’s no double-dipping. If a partner buys the asset in their own name and doesn’t qualify as a small business taxpayer personally, they can’t claim the write-off. 

Using simple depreciation

If your business buys an asset valued over the IAW threshold, you can’t claim the immediate deduction. You can, however, allocate it to your general small business pool and use the simplified depreciation rules

The general depreciation rules apply if you are ineligible or choose not to use the simplified rules, or if the ATO classes your business as medium-sized. 

Using a general small business pool allows you to combine the business portion of higher cost assets and claim a 15 per cent deduction in the financial year you start using them, then 30 per cent each year after that. 

Accelerated depreciation initiative

As part of the government’s coronavirus response, medium businesses with a turnover of less than $500 million can use accelerated depreciation rules to deduct 50 per cent of the cost of an eligible asset on installation. Normal depreciation rules apply to the balance of the asset’s cost. 

In these unprecedented times, we are here to assist you. Please don’t hesitate to give us a call on 03 5120 1400 if you have any questions about the instant asset write off or any aspect of the broader stimulus package.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

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