If you need to buy a depreciating assets in your business there is a whole lot of reasons to go shopping under the new rules.
New rules that came in on 1 July 2012 provide significant tax advantages for small business. In some cases, a small business can claim the whole amount of the asset purchased as a tax deduction in the year of purchase. Normally, assets purchased in a business are depreciated over a number of years, or their effective life.
To access these simplified depreciation rules you need to be in business and have an annual turnover of less than $2 million. This includes aggregate turnover of any entities connected to you, such as a trust.
Buying Assets Under $6,500
If your business qualifies then any depreciating assets you purchase below $6,500 can be written off in the year of purchase. If your business is registered for GST the $6,500 is exclusive of GST.
So if you need to buy 3 new computers this financial year (2012/2013) at a cost of $5,000 each (GST ex). Since each laptop is less than $6,500, they can be written off immediately. The total deduction that can be claimed in the 2013 tax return is $15,000.
The $6,500 threshold applies on an asset by asset basis, so you can claim the immediate deduction on more than one asset.
As well as being able to claim an immediate deduction for assets with an initial cost of less than $6,500, it is also possible to claim an immediate deduction for additions or improvements to these assets in a later income year. For example, lets say buy a Compactus for $6,200 in 2012/2013. In the following financial year, 2013/2014, you buy more Compactus Units to improve the Compactus Unit at a cost of $2,000. The initial purchase of the Compactus is deductible in 2012/2013 and the additional Compactus Units are deductible in the 2013/2014 year. However, it is only possible to claim an immediate deduction for the first additions or improvements. Any additions or improvements beyond the first component are not immediately deductible but depreciated over a period of time.
Buying A Car
If you need to buy a motor vehicle you can claim an immediate deduction for the first $5,000 on new and second hand vehicle purchased from 1 July 2012. The balance of the vehicle’s cost price is depreciated at 15% in the first year.
A motor vehicle is any motor powered on-road vehicle including four wheel drives. Graders, tractors, harvesters etc., don’t qualify as their primary purpose is not on public roads.
Limits apply to the deduction you can claim for the vehicle you buy. If it’s a luxury vehicle, regardless of how much you paid, the cost for depreciation purposes is reduced to $57,466 – the luxury car limit.
What does ‘immediate deduction’ mean?
An immediate deduction means that you can claim the full tax deduction when your business lodges its next tax return. It’s not immediate in the sense that you get to make the claim straight away and the tax office sends you a cheque, but tax deduction is immediate.
The deduction is offset against your assessable income and reduces the overall tax you pay. The deduction will be at your applicable tax rate – so, 30% for companies and your applicable marginal tax rate for unincorporated entities. Like all other tax deductions, keep in mind that even if you get a 100% tax write-off, you still need to be able to fund the after tax cash cost.
What about other assets?
What happens if the asset you need to buy is over $6,500 (and is not a car)? Small businesses are able to pool all other assets at 15% for the first year the asset is in the pool and 30% for each subsequent year. If the value of the pool drops to below $6,500, then the whole pool can be written off.
BUT! Before you go on a spending spree….
Before going on a spending spree it’s important to take a look at the cash flow of the business.
Never purchase an asset just for the tax deduction and make sure you have the cash funds or finance available before you buy. If you need to finance the purchase make sure this is structured correctly to allow you to claim back the GST and maximise your deductions.