Ending Soon! Instant Asset Write-Off

“Instant Asset Write Off” winds back 30^th June 2023 – what does that mean for my business?

Between 2019 and now, we have been living in a world of ever-increasing allowances for businesses to buy equipment such as vehicles and machinery and claim the purchase immediately in the year it was purchased (rather than claim depreciation over a longer period). This started at $20K in 2019, then went to $25K, $30K, $150K and then more recently an unlimited ability for most businesses to claim equipment of any value in the year of purchase.

This led to some immediate relief from tax for businesses, but you might have heard your contact at HQB warning you along the way along the lines of:

• “This is not additional tax deductions, it just means you get the tax deduction earlier!”, or
• “Remember, one day you will sell this equipment and then the sale price will be 100% taxable profit!”
• “its only a timing benefit”

From 1 July 2023, the instant asset deduction returns to a limit of $20,000 for most businesses. Meaning that equipment up to $20,000 can still be claimed immediately, but anything of higher value will be depreciated.

If you want the claim for a larger amount for this year, the asset HAS to be installed and ready for use by 30 June 2023.

What you need to be aware of as a business owner is the impact of selling the equipment bought during the recent years of frenzied asset write offs.

Let’s look at the impact of trading in a Ute from 1 July onwards. Assume the following facts:

• Bought a Nissan Navara in 2020 for $80,000 (excl GST) and claimed it fully at the time in your tax return
• August 2023 trade in that existing Navara for $60,000, and pick up a Hilux instead for $80,000

Impact on your 2024 tax return:

• Profit on sale of Navara of $60,000
• In the 2024 financial year you will get a tax deduction for depreciation of the Hilux of 15%. So tax deduction 15% x $80,000 = $12,000
• So net impact on your taxable income is to increase it by $60,000 – $12,000 = $48,000
• So how will this impact the tax you will pay?
  • Most companies pay tax at 25%, so tax payable on this trade-in will be $48,000 x 25% = $12,000
  • Other entities such as sole traders, trusts and partnerships will have varied tax rates, but most likely a successful business will end up paying tax on this transaction at between 34.5% – 47% = $16,560 to $22,560
• Note that the Hilux will continue to attract depreciation deductions in future financial years. So the above only considers the year 1 impact only

Note that we do not suggest that you hold onto old equipment due to tax. Rather we suggest that a transaction such as the one above has an impact on your overall tax planning strategy, and so we encourage you to consult with HQB on how to best manage this in your circumstances.

– James Davis

Posted 14 June 2023

This article is compiled as a helpful guide for your private information and is subject to copyright. We suggest that you do not act solely on the basis of material contained in this article because items are of general nature only and may be liable to misinterpretation in particular circumstances. We recommend that our advice be sought before acting on any of these crucial areas.