One of the least understood, but perhaps most powerful components of the governments COVID-19 stimulus package is the increase of the instant asset write off threshold to $150,000.
In this article, I will not only show you how to calculate your instant asset write off tax benefit, but empower you with the knowledge to leverage it to create better financial security and growth opportunities in your business.
Calculating the instant asset write-off for your business
To quickly calculate how much of a tax break your business may receive on its 2020 return, watch the video below, and download your free copy of the instant asset write-off calculator here.
Once you have watched the instant asset write off video, continue reading below to discover why this incentive could be extremely powerful for your business.
What is the instant asset write off?
Prior to the COVID-19 crisis, businesses had the ability to carry out an “instant asset” write-off on purchases of up to $30,000.
What this basically meant was that your business could make single purchases of up to $30,000 and the full amount of this purchase would be deducted from that years taxable net profit.
As part of the government stimulus package aimed at supporting small businesses and encouraging them to make purchases, that threshold has been increased to $150,000 for general one off purchases, and $57,581 for the purchase of vehicles.
Lets take a look at how this increase in the instant tax write-off threshold might affect a typical small trade business.
Example 1 of how the instant asset write off would impact the tax payable of a small business.
For this example we will take a look at a fictional plumbing company – Bob’s Plumbing:
- Bob’s Plumbing was set to make $100,000 in net profit for the financial year ending June 2020.
- Ordinarily he would pay 27.5% tax on this profit for a total tax liability of $27,500
This is represented in the following table:
| Total NET profit for the business in 2020 | $100,000 |
| Tax rate for the company | 27.5% |
| Total tax payable | $27,500 |
On the 20th of April however, he decides to take advantage of the instant asset write off incentive and purchase two work vehicles.
- He purchases a 4×2 single cab ute for one of his supervisors for $35,000 (excluding GST)
- He purchases a brand new 4×4 dual cab ute for himself for $55,000 (excluding GST)
NOTES:
- Both vehicles are under the $57,581 threshold for instant asset write off of vehicles so they are both fully claimable – for non-vehicle purchases the limit is $150,000 (for details on the vehicle thresholds click here)
- In addition to the $90,000, a total of $9,000 has been paid in GST and is claimable off the next BAS return.
The total value of purchases claimable as an instant asset write off:
| Purchased Item | Claimable Amount |
|---|---|
| 4 x 2 single cab ute | $35,000 |
| 4 x 4 dual cab ute | $55,000 |
| Total in Claimable Instant Asset Write-offs | $90,000 |
| Total GST Rebate | $9,000 |
Now lets take a look at Bob’s Plumbing’s adjusted company profit and tax payable for 2020:
| Tax Item | Saving |
|---|---|
| Original taxable profit prior to purchases | $100,000 |
| Total Purchases claimable for instant asset write-off | $90,000 |
| New Taxable Profit for 2020 | $10,000 |
| New Tax Payable for 2020 | $2,750 |
The total tax savings would be as follows:
| Tax Item | Saving |
|---|---|
| Company tax saved on the 2020 financial year | $24,750 |
| Tax saved on the June (Q4) BAS statement | $9,000 |
| Total reduction in tax liability for period ending June 30 | $33,750 |
This benefits Bob’s Plumbing in two ways:
- The business now has two new vehicles that can be used to service more clients and create a bigger presence on the road.
- The business has an extra $33,750 up its sleeve that can be used towards:
- Extra sales/marketing efforts to generate new work or;
- Covering overheads (by keeping it in the bank)
Let’s take a look at another example of a different trade business looking to make several purchases of both vehicle & non-vehicle assets.
Example 2 of how the instant asset write off would impact the tax payable of a small business.
For this example we will take a look at a fictional tree lopping company – Tim’s Tree Lopping:
- Tim’s Tree Lopping was set to make $200,000 in net profit for the financial year ending June 2020.
- Ordinarily he would pay 27.5% tax on this profit for a total tax liability of $55,000
This is represented in the following table:
| Total NET profit for the business in 2020 | $200,000 |
| Tax rate for the company | 27.5% |
| Total tax payable | $55,000 |
Between March 12 to June 30 however, he decides to take advantage of the instant asset write off incentive and purchase a work vehicle and some plant.
- He purchases a 4×4 Landcruiser ute for $90,000 (excluding GST)
- He purchases a boom lift for $45,000 (excluding GST)
- He purchases a Rayco Diesel powered stump grinder for $69,000 (excluding GST)
NOTES:
- Since the vehicle is over the $57,581 threshold for instant asset write off, only the maximum $57,581 is claimable off the business’s taxable income.
- As the threshold for non-vehicle purchases is $150,000, the full amount for both the stump grinder and the boom lift are claimable off the taxable income.
| Purchased Item | Claimable Amount |
|---|---|
| Landcruiser Ute | $57,581 |
| Boom Lift | $45,000 |
| Rayco Stump Grinder | $69,000 |
| Total in Claimable Instant Asset Write-offs | $171,581 |
| Total GST rebate | $20,400 |
Now lets take a look at Tim’s Tree Lobbing’s new company tax liability for 2020…
| Tax Item | Saving |
|---|---|
| Original taxable profit prior to purchases | $200,000 |
| Total Purchases claimable for instant asset write-off | $171,581 |
| New Taxable Profit for 2020 | $28,419 |
| New Tax Payable 2020 | $7,815 |
The total tax savings would be as follows:
| Tax Item | Saving |
|---|---|
| Company tax saved on the 2020 financial year | $47,185 |
| Tax saved on the June (Q4) BAS statement | $20,400 |
| Total reduction in tax liability for period ending June 30 | $67,585 |
NOTE: In addition to the $24,750 saved on the 2020 company tax liability, the $9,000 in GST paid on the vehicles will also be claimable off the next BAS statement (June 2o20 if submitted quarterly)
Disclaimer: This is not Financial Advice.