It’s one of the big ticket items for businesses in the federal budget, but how exactly will the massive new asset write-off scheme work in practice?
On Tuesday night, Treasurer Josh Frydenberg revealed that almost all Australian businesses will now be able to immediately write-off the full value of all new assets purchased over the next two years, without limits on the value of individual purchases.
The $27 billion budget measure is a significant expansion of the existing instant asset write-off scheme, which has also been extended for another six months.
So how does the new “immediate expensing” scheme work, and which businesses are eligible?
Here’s what you need to know.
Who can access the new scheme?
The new asset write-off measure is available to all Australian businesses with up to $5 billion in annual turnover.
This means 99% of businesses, or some 3.5 million businesses, will have access to the scheme, and only the largest Australian businesses will be excluded.
What does it allow my business to do?
Under this scheme, businesses will be able to claim the full value of all new eligible depreciable assets of any value which are first used or installed before June 30, 2022.
Businesses will also be able to claim full deductions for the cost of improvements made to existing depreciable assets.
The scheme is essentially a vastly expanded accelerated depreciation program that allows businesses to claim a tax deduction for the full value of a purchase after its use, rather than claim depreciation amounts over several years.
The aim is to get businesses to bring forward spending on new assets by allowing them to claim the full tax deduction upfront, and thereby reducing the amount of tax they pay.
When does the scheme start?
Treasurer Josh Frydenberg said the scheme started from 7.30pm, October 6, 2020 — or the very moment he began delivering his budget speech.
Of course, as is the case with most budget measures, legislation will need to be passed in order for the tax incentive to officially come into effect, but it is expected the Labor opposition will support this measure.
How long will it last?
This new scheme is a temporary measure and will be in effect until June 30, 2022.
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This means if businesses want to make a claim under the scheme, the assets purchased must be installed and ready to use by June 30, 2022.
The timeframe for the measure has been welcomed by accounting software provider MYOB, with chief executive Greg Ellis telling SmartCompany this is “excellent news for a third of Australia’s SMEs, who our data shows anticipate recovery to extend beyond 12 months”.
What assets can I claim under the scheme?
All new assets are eligible under the scheme, provided they meet existing criteria for depreciable assets.
Examples put forward by the government include coffee machines, forklifts, tractors, freezers and labellers.
The government has also confirmed to SmartCompany there is also no cap on the value of the new assets that can be claimed.
This differs from the existing instant asset write-off scheme, which has a cap of $150,000 for purchases.
What about secondhand assets?
In the budget papers, the government said SMEs with up to $50 million in annual revenue will also be able to immediately claim a full deduction on all secondhand purchases.
At the same time, businesses with between $50 million and $500 million in annual revenue will be able to claim a full deduction for secondhand assets worth up to $150,000 in value under the existing instant asset write-off provision, if the assets are purchased by December 31, 2020.
The two schemes are essentially operating side-by-side for the next few months.
While this potentially confusing for business operators, Mark Chapman, tax communications director at H&R Block, says it means businesses with up to $500 million in annual turnover will be able to claim the full value of secondhand purchases, “one way or another”.
Will there be any exclusions?
There are only a few types of assets that will be excluded from the program, according to additional information provided to SmartCompany by Treasury.
These include capital works, horticultural plants, and assets allocated to a software development pool, which are subject to separate tax treatments.
Buildings are also excluded, as are intangible assets, such as customer lists and goodwill.
Chapman tells SmartCompany it is likely that very expensive cars will be excluded from the scheme, as there are already provisions in place to exclude such purchases from existing depreciation arrangements.
Similarly, Gavan Ord, manager of business and investment policy for CPA Australia, says there may be further exclusions contained in the legislation for the measure when that is tabled in parliament.
Are there other changes to the existing instant asset write-off scheme I need to know about?
Yes. The existing instant asset write-off scheme is also being extended for another six months to allow businesses that have already purchased eligible assets to install them or use them for the first time.
The extension for these businesses will end on June 30, 2021.
Is there anything I need to be wary of?
Chapman says, as is the case with any tax claim, it’s important for businesses to make sure they keep a record of all their purchases claimed under the scheme, included when they made the purchase and the value.
If you acquire an asset that you will also be used personally, you will only be able to claim a portion of the value under this tax measure, says Chapman.
“You can’t automatically claim the full cost,” he says.
It’s also important to remember that accelerated depreciation schemes are just that — a way to accelerate the depreciation you would ordinarily claim over a longer period of time. They do not offer a “rebate” on the purchase, says Chapman.
“What you get is a tax deduction,” he says, “not a dollar-for-dollar rebate”.
“I think there’s still a fair bit of misunderstanding.”
In fact, Chapman believes the government’s new loss carry-back scheme may potentially be more useful for companies, as it will provide refunds on taxes paid on previous profits.
“We’ve long needed that measure and it is very good that they have introduced it,” he says.
“Hopefully they will make it permanent.”
MYOB would also like to see the government consider a similar program that encourages businesses to invest in digital products, not just tangible assets.
This could take the form of “tiered deductions” for Software-as-a-Service expenses over the prior financial year, says Ellis.
“With business moving at pace to the cloud, particularly in light of COVID, policy adjustment to accelerate this transition would assist SMEs in taking advantage of the digital opportunity,” he says.
More information about the asset write-off measure is available in this fact sheet from the government.