$20,000 instant asset write-off for small business: beware timing

On 13 September 2023, the Treasury Laws Amendment (Support for Small Business and Charities and other Measures) Bill 2023 was introduced in Federal Parliament to allow a deduction of $20,000 (up from $1,000) for the instant asset write-off of depreciating assets acquired by small business entities in the period from 1 July 2023.The rules are beneficial for small businesses but there can be some confusion around the timing aspects. This brief article explains what the proposed amendments will do.

These new rules were previously announced by the Federal Government in its May 2023 Federal Budget. At the time of writing, the legislation containing these measures was before the Senate.

In the period from March 2020, as part of tax relief measures arising out of the COVID-19 pandemic, temporary full expensing of certain depreciation assets allowed many businesses to write off the entire cost of certain assets. From 1 July 2023, under simplified depreciation rules, depreciating assets costing less than $20,000 (excluding GST), may be immediately deducted, where the asset is first used or ready for use in the year ending 30 June 2024. Note that depreciating assets that are first used or installed ready for use for a taxable purpose on or after 1 July 2024 will be subject to the $1,000 threshold.

The $20,000 threshold will apply on a per-asset basis, so small businesses will be able to instantly write off multiple assets.

The instant asset write-off rules are available to entities that meet the definition of “small business entity” and where the entity carries on a business with an aggregate turnover of less than $10 million. Connected entities to a small business taxpayer may also need to be considered to qualify for a deduction under the $20,000 instant asset write-off.

Depreciating assets that cost $20,000 or more are allocated to a small business entity general small business pool and deducted at the following rates:

• 15% in the year the depreciating asset are allocated to the pool; and
• 30% in subsequent years.

The following example illustrates the operation of the $20,000 instant asset write-off for small business that is proposed to apply in the period from 1 July 2023.

Example

Terri is a bricklayer who runs a small business entity and has elected to use the simplified depreciation rules. 

Assets below the threshold
On 1 September 2023, Terri purchases a tablet for $4,000 to be used 100% for business purposes. Terri can use the instant asset write-off to immediately deduct the full cost of the device, as its cost is below the threshold of $20,000. 

Assets exceeding the threshold
On 1 December 2023, Terri purchases a ute for $50,000. She estimates the vehicle will be used 50% for business, and 50% for her private purposes. Terri cannot use the instant asset write-off here, as the ute’s total cost of $50,000 exceeds the per-asset threshold of $20,000. 

The $25,000 taxable portion of the ute’s cost (representing her 50% business use of the vehicle) is allocated to Terri’s general small business pool. Terri can claim a deduction of $3,750 (15% × $25,000) in the year ended 30 June 2024. Deductions for subsequent income tax years will be calculated at the rate of 30%. 

If the balance of a small business entity's general small business pool is less than $20,000 at the end of the income year ending 30 June 2024, the small business entity will be able to claim a deduction for the entire balance of the pool.

Certain so-called “lock-out” rules may also apply where a small business taxpayer has elected to enter the instant asset write-off rules, then in subsequent years opts out of the application of such rules. In these circumstances, the lock-out rules would apply so that the taxpayer will not be able to apply the simplified depreciation rules for a period of five income years. This restriction commences from the first of the later years for which the taxpayer could have made the choice to apply the rule.

The operation of the rule has been modified over recent years so that small business entities did not need to apply the lock-out rule to income years if any day in the year occurs on or after 12 May 2015 and on or before 30 June 2023. The amendments in the Bill currently before Parliament propose to suspend the operation of the lock-out rule for a further 12 months to 30 June 2024. As a result, small businesses will be able to choose to apply the small business simplified depreciation rules and take advantage of the $20,000 write-off threshold while it applies without being locked out.

Source: www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r7081