The instant asset write off or the temporary full expensing as it’s now called is simply a scheme to encourage small business owners to invest more in their businesses by offering tax deductions on assets bought and used within the financial year.
What Is Instant Asset Write Off?
Here is how it works:
As we all know, taxes are calculated depending on your net income during the financial year.
So if you made a 100 thousand dollars profit this year, then you have to pay 25 thousand dollars (25%) in taxes.
But what if you bought a $100,000 piece of equipment that has an expected useful lifespan of 10 years, shouldn’t this money be
considered as a cost?
Well, under the old scheme (depreciation), you will have to depreciate this equipment cost (100 thousand dollars) over its expected useful lifespan (10 years). In other words, you get 10 thousand dollars in tax deductions every year for 10 years.
So far it’s great, you are saving some money after all. However, the problem is that because you only get a 10 thousand dollar deduction in year one, the rest of your equipment cost (90 thousand dollars) would still be seen as an outgoing cash flow in your PI (Profitability Index).
The result?
Now you have to pay tax for this 90 thousand dollars even though you had spent it on the business’s development. So this costs you an extra 22.5 thousand dollars, which makes absolutely no sense.
Luckily for us, a new scheme was introduced, the temporary full expensing scheme or the new instant write off scheme.
From its name, you know that the payback for your investment will be instant and you don’t have to depreciate the equipment’s value over many years.
Using the same example as before, if your business has a net profit of 100 thousand dollars and you bought the same piece of equipment that costs exactly 100 thousand dollars, then with the new instant asset write off scheme, your equipment price will be treated as a cost instead of outgoing cash flow.
This means that because your net income is 100 thousand dollars and you spent 100 thousand dollars on business equipment, then your PI will change from profit to breakeven and you won’t have any profit for taxation.
Thus, you won’t have to pay any taxes at all and you will save 22.5 thousand dollars. Pretty good, huh?
It’s important to mention that this doesn’t mean you should go on a shopping spree as this won’t make you any profit, in fact, it will lose you a lot of money.
Here are 2 examples of a good investment and a bad investment.
Example: 1
Oliver’s Solar System
Oliver owns a small grocery store in Queensland that made 100 thousand dollars in profit this year.
Oliver noticed that utility bills are getting more and more expensive, so he decided to buy a small 10KW solar system to help reduce its energy expenses. This system cost him about 7 thousand dollars and thanks to the instant asset write off, Oliver’s new net income will be 93 thousand dollars and he will only pay 23.5 thousand dollars instead of 25 thousand dollars. In other words, he saved 1500 dollars.
However, because this is a great investment, this solar panel system will save him around 50 thousand dollars in utility bills over 20 years.
So overall, Oliver made about 50 thousand dollars on a 5.5 thousand dollars investment. That’s almost 100X ROI.
That’s not just it, because Oliver installed a solar system, he is now eligible for the Small Scale Renewable Energy Scheme, which will save him even more money.
And finally, if Oliver owns the property he installed the solar system on, this property’s value is potentially increased as well. What an amazing investment.
Example: 2
Oliver’s Batmobile
Oliver, who is a huge Batman fan, got himself the best accountant in the world that somehow convinced the Australian Tax Office that buying a batmobile is actually crucial for Oliver’s grocery store success.
So Oliver, who had a 100 thousand dollars net profit, bought a really small batmobile for 100 thousand dollars.
Fun fact: In 2013, the original batmobile was sold for 4.6 million dollars at the Berrett-Jackson classic car auction.
Back to our very “POSSIBLE” scenario, thanks to the temporary full expensing scheme, now Oliver is eligible for around a 60 thousand dollar tax deduction assuming that the batmobile will be only used for businesses purposes (vehicle has a deduction threshold of about 60 thousand dollars).
After doing the math, Oliver will only pay 10 thousand dollars in tax instead of 25 thousand dollars, so he saved 15k.
Literally, any small business owner can benefit from the instant asset write off as long as the business has an aggregated turnover of less than 5 billion dollars and meets the alternative income test.
However, it’s important to mention that to claim the deductible, you must first use the asset before June 30, 2022.
Most plants and equipment asset purchases are covered by the temporary full expensing scheme including tools, office equipment, generators, solar system, vehicles, etc.
Yes, second hand goods are also eligible for the instant asset write off scheme as long as your business’s turnover is less than 5 billion dollars.
If you got a piece of equipment you can improve it to work and still claim on the improvements you have made to that piece of equipment under the instant asset write off scheme.
- All the assets allocated to software development pool or a low value pool
- Some primary production assets such as fencing, water facilities, fodder storage assets, etc
- Assets that will never be located in Australia
- Assets that won’t be used in Australia
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