The federal government has handed small business a very powerful incentive to spend with its new accelerated depreciation rules. We review what the law means and how it should be applied to your year-end shopping plans.
What’s the new law?
First of all, it should be noted that so far this is an announcement, not a law. The legislation is now before parliament and if enacted will be backdated to budget night.
Assuming the legislation passes, from 7:30pm on 12 May 2015 (Canberra time) until the end of June 2017 all small business with sales under $2million are eligible for an immediate tax deduction for any individual asset costing less than $20,000.
Before and after these dates and time, the existing automatic deduction level of $1,000 will apply.
So how does that save me money?
The generous automatic deduction level brings forward your tax savings on major capital purchases. In the long term your total deductions will be the same. But in the short term you are going to have a lot more cash in hand to reinvest in your business.
So, for example, let’s say that you own a bakery and you invest in a new oven that costs $15,000. In the past you would have been able to depreciate 15% in the first year, for a deduction of $2,250. At 30% tax rate, that’s a reduction in taxes of $675.
Under the new rules you can now deduct the entire $15,000. At a 30% tax rate (these rates are changing but not until next financial year) that’s a reduction in your tax bill of $4,500.
In the long run the tax man is still going to collect the same amount. But this year you will have an extra $3,825 in your pocket to invest in growth.
Exactly what items qualify?
The rules around asset eligibility do not change. The basic test is still that the asset must be used for an income producing purpose.
The asset can be second hand – it just has to be “new” to your business.
The rule applies on a per asset basis, so you can use accelerated depreciation on however many assets you purchase under the $20,000 price ceiling.
You can also claim on amounts spent to improve or transport an existing asset that was purchased the new rule came into affect.
From a timings perspective the asset must have been purchased AFTER 7:30pm on 12 May 2015, and must be first used or installed BEFORE 30 June 2017. So you will not be able to apply this to assets purchased before budget night.
Can I game the system?
In a word: no. The ATO will be on the lookout for rorts.
The legislation specifically prohibits temporarily disposing of an existing asset and then buying it back after the start of the depreciation laws.
It is also prohibited for a group of small businesses to band together and onsell assets to one another to satisfy the first acquired rule.
So what should I buy before 30 June?
First rule: don’t buy something you don’t need just to cut your taxes! Keep a level head and don’t let the government’s generous offer tempt you to buy things you don’t need.
Second rule: don’t buy something you can’t afford. Even with a generous tax break, remember that you still have to have the cash to pay for a new asset. Make sure you don’t jeopardise your cash flow for the sake of a tax break.
If you have assets costing $20,000 or less that your business requires now or in the short term future and you know you can afford, then it makes sense to bring those purchases forward before 30 June.
The one small caution here is that the new rules still need to be passed into law. However, if you need the asset then purchasing in advance of fiscal year end still makes sense even if the new laws don’t pass.
Not sure? Give us a call. We’d be happy to talk you through this new legislation and what it means for you.