The federal government’s 2015 budget included some unexpected good news for small business owners. However the immediate tax deduction for assets costing less than $20,000 purchased by eligible small business owners could be lost if finance is used.
Q. I run a landscaping business and need to update my ute as it is more than seven years old and breaking down regularly. A new ute will cost me a proximally $30,000. Can you tell me whether the immediate write off for assets costing less than $20,000 will be of any benefit to me?
A. To work out whether this new instant tax write-off will be of benefit requires a decision-making process. First, there is no point purchasing an asset unless the benefits outweigh the cost. It does not make business sense to buy something just to receive a tax deduction.
The new ute could produce a benefit given the old one is starting to cost money because of breakdowns and it’s causing disruptions to your business when it is off the road. The new ute will also probably have better fuel economy.
The second consideration is that a tax deduction is only a benefit if the business is profitable. If the instant deduction for an asset that costs less than $20,000 increases or creates a loss, the immediate tax benefit is either delayed or lost.
As the new ute will cost more than $20,000 you will not receive an immediate tax deduction in the first year. But because the ute can be added to a depreciation pool, which is a number of assets depreciated as a group rather than as individual items, if value of the depreciation pool falls below $20,000 by June 30, 2017, a tax deduction can be claimed then.
Because assets costing $20,000 or more can be added to an asset pool, the written down value of the asset pool as at June 30, 2014 will have an effect on whether the asset can be written off before June 30, 2017.
As long as your business has a depreciation pool with a value of less than $19,000 now, and no other assets costing $20,000 or more are purchased after July 1, 2015, and you purchase the ute before June 30, 2015, you will be able to claim a tax deduction for its cost by June 20, 2017.
If your business does not have a depreciation pool now the tax deduction claimable for the ute in the 2015 year will be $4500. In the 2016 the depreciation tax deduction will be $7650. This would result in the ute having a written down value of $17,850 at June 30, 2016, at which time it could be written off and a tax deduction claimed for its reduced value.
For a business to claim the tax deduction it must own the asset purchased. This means if the purchase is financed a lease cannot be used. Under a lease the finance company owns the asset, while under other financing arrangements the business owns the asset.