The sweetener in this year’s budget for SMEs was undoubtedly the short-term accelerated depreciation write-off up to $20,000 (up from the current $1000 threshold) for assets acquired by small businesses (that is, businesses with an aggregate annual turnover of less than $2 million). Legislation was introduced in Parliament last week to implement the measure.
Many businesses may have reacted straight away and rushed out to buy assets under the $20,000 threshold so they could claim the deduction. However, some caution was recommended until the legislation to give effect to the write-off had been introduced – so that the actual words of the legislation could be examined.
The other thing to remember is that the asset purchased must be used in the business for an income-producing purpose. The Tax Office says it will monitor how the write-off is being used to make sure it is not being rorted. So once tax returns have been lodged claiming the asset write-off, some SMEs might receive a “please explain” from the ATO.
Labor has already indicated it will support the budget’s small business tax measures, so the progress of the legislation through Parliament seems assured although the latest parliamentary setback shows there are no guarantees about this.
So, what does the legislation say? Well, it is broadly in line with what was announced, but there are some finer points that need to be understood.
The existing accelerated depreciation rules for small businesses (businesses with an aggregate annual turnover of less than $2 million) will be amended by temporarily increasing the threshold under which certain depreciating assets, costs incurred in relation to depreciating assets and general small business pools can be written off.
The increased threshold of $20,000 would apply only to assets that were first acquired at or after 7:30 pm, legal time in the ACT on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. From 1 July 2017, the threshold would revert to the existing $1000. The increased threshold is available to all small businesses (including those who previously opted out of the simplified depreciation rules).
Key features of the new rules
- Small business entities can claim an immediate deduction [ie in their next tax return] for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 7:30 pm, by legal time in the ACT, on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. Depreciating assets that do not meet these timing requirements would continue to be subject to the $1000 threshold. The asset can be new or second-hand.
- The write-off is for the taxable purpose proportion of the cost of an asset acquired for less than $20,000. In general terms, the “taxable purpose proportion” of a depreciating asset represents the proportion of an asset’s use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than $20,000 is claimed in the income year in which the asset was first used or installed ready for use.
- The requirement that an asset be “first acquired” at a particular time is not a feature of the current rules and is an additional requirement for the increased $20,000 threshold to apply. This additional requirement limits access to the increased threshold to a small business entity’s “new” assets (don’t be confused, the asset acquired can be new or second-hand, but it must be a “new” asset of the business). Requiring a depreciating asset to have been “first” acquired by the small business entity is designed to ensure that assets cannot satisfy the acquisition requirement if they were previously acquired at an earlier time, temporarily disposed of, and then reacquired at or after the 7:30 pm start time.
- Depreciating assets that are first acquired prior to the 7:30 pm start time would continue to be subject to the existing $1000 threshold, irrespective of when they are first used or installed ready for use. The existing $1000 threshold would also apply to depreciating assets that are first acquired from the 7:30 pm start time but were not first used or installed ready for use on or before 30 June 2017.
- Small business entities can claim an immediate deduction for depreciating assets that cost less than $1000 if the asset is first used or installed ready for use on or after 1 July 2017.
- Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets (e.g. an amount spent on improving or transporting a depreciating asset) that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7:30 pm, by legal time in the ACT, on 12 May 2015, and on or before 30 June 2017. Costs that are incurred outside of these times would continue to be subject to the $1000 threshold.
- As a result of the proposed amendments, if a small business entity incurs a cost of $20,000 or more that is included in the second element of a depreciating asset’s cost, and the depreciating asset has been written off in a previous income year, the asset in relation to which the cost was incurred will be treated as having a value equal to the amount that is included in the second element of its cost. The asset would then be allocated to the small business entity’s general small business pool, deducted at a rate of 15% in the income year in which the amount was incurred, and then deducted at a rate of 30% in subsequent income years as part of the general small business pool.
Warning: Artificial or contrived arrangements to claim deduction
The government says that consistent with the objective of the increased threshold applying to newly acquired assets (remember they can be new or second-hand), it is not intended that assets acquired under artificial or contrived arrangements have access to the increased threshold, or for that matter to the existing arrangements. An example of an arrangement of this kind would be where a number of related small business entities that earned income from similar income sources sold their assets to one another in order to satisfy the “first acquired” requirement and write off the full value of those assets under the increased threshold.
While a specific provision has not been included under the amendments in relation to artificial or contrived arrangements, the government says the general anti-avoidance provisions in the tax law are intended to be applied to arrangements of that kind.
The government says: “In the event of evidence that small business entities systematically engaged in artificial or contrived arrangements designed to take advantage of the increased threshold and the general anti-avoidance provisions became too administratively difficult to apply, retrospective amendments to explicitly prohibit such behaviour would be considered to ensure that the integrity of the small business capital allowance provisions is maintained.”
The accelerated depreciation rules are a very valuable incentive to many SMEs, although spending up to $20,000 on an asset just to get the tax deduction might not be prudent. As indicated above, there are some finer points to the new rules that need to be understood, so SMEs would be wise to seek professional advice before they purchase. With 30 June this year fast approaching, pressure on SMEs to act can be high, but taking a little time to consider the implications with a “cool head” can be very beneficial.
Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.