The Instant Asset Write-Off Guide for business owners

In March 2020, the Government massively expanded the scope of the Instant Asset Write-Off (IAWO) scheme, following the onset of coronavirus.

The threshold was increased to $150,000 from $30,000 and the eligibility expanded to cover businesses with aggregate turnover of up to $500 million, up from $50 million. The scheme, which normally ends on July 1, has also been extended until 31 December 2020.

By taking advantage of the IAWO, a business can get the equipment it needs now and claim the full purchase price as a tax deduction.

However, according to ATO data and the Australian Small Business and Family Enterprise Ombudsman, many small business operators are unaware of the program or don’t really understand how the scheme works in practice. So, let’s take a closer look at some of the key concepts and see what the potential benefits are for business owners.

What is the Instant Asset Write-Off scheme?

The IAWO scheme allows small businesses to write off the business portion of any asset purchase within the year it is first used, or installed ready for use, provided the total cost of the asset is within the designated threshold, now $150,000.

By claiming a deduction for the full value of each asset purchased under $150,000, a business owner may be able to reduce taxable income by the amount of this deduction for the applicable tax year in which this deduction is applied.

It is important to note that under the IAWO scheme, a small business owner is effectively claiming 100% of the depreciation of the asset in the year it is first used or installed ready for use, as opposed to claiming a proportionate amount of depreciation each year over the depreciating asset’s effective life.

To put it simply, by claiming 100% of an asset’s depreciation under the IAWO scheme in one year, a business owner is forfeiting any future entitlement to claim depreciation for that specific asset.

Important things to consider:

• To be eligible for the scheme, you must be a registered business with an annual turnover of less than $500 million.
• The entire cost of the asset must be less than the current $150,000 threshold, irrespective of any trade-in amount.
• There is no limit to the number of assets that can be purchased under the IAWO scheme. However, each individual asset must not exceed the current $150,000 threshold to qualify.
• Depending on your GST status, the total deductible value of the asset may vary. If you are GST registered, the total amount you can claim under the IAWO scheme should exclude the GST component of the purchase price. This is because the GST is typically claimed as a credit in your activity statement for the relevant period. If you are not registered for GST, your IAWO calculation should include the GST paid on the asset purchase.
• The amount you are able to claim will be determined by how much you use the asset to earn assessable income, i.e. the percentage of private usage must be excluded from any IAWO calculation.
• If you intend to rent or lease a business asset, you will not be eligible to take advantage of the IAWO scheme. A business owner’s ability to claim depreciation over an asset’s effective life or under the IAWO scheme is contingent on the business owning the asset. Under a rental, finance lease or operating lease agreement, the financier (lessor) will effectively purchase the asset on the customer’s behalf, thus inheriting all taxation benefits associated with ownership such as GST and depreciation. The borrower (lessee) will make rental/lease payments under the terms of the finance agreement but will not be entitled to any ownership benefits such as claiming the GST, depreciation or taking advantage of the IAWO scheme.
• The IAWO scheme is effectively a tax deduction and therefore if your business is at break-even or operating at a loss, there is no real benefit from using the IAWO.
• It is important to discuss the tax consequences of the IAWO scheme with your tax accountant.

If you’re considering purchasing an asset, consider how long you intend to own it and whether it makes sense to claim 100% of the depreciation in the year of purchase as opposed to claiming the depreciation incrementally over a longer period.

For businesses that are paying tax, it could make sense to claim the IAWO as an immediate cash benefit and this could trump other considerations. However, it’s important to discuss your options with your tax accountant and get advice specific to your business circumstances.

Expansion to larger sized businesses

An important change to the IAWO scheme is that it now includes businesses with annual turnover of under $500 million, up from $50 million previously. According to the Government, the scheme would benefit approximately 3.5 million business across Australia.

These enterprises are likely significant tax payers and would benefit from taking advantage of the IAWO. As there is no limit to the number of assets that can be purchased under the program, as long as individual assets don’t exceed the $150,000 threshold, the scope for making investments and receiving immediate tax concessions could become more attractive.

For example, imagine a car hire business with a fleet of 30 vehicles that needs to be upgraded every few years. Under IAWO, the business would be able to replace an unlimited portion of its fleet and immediately claim the instant write-off tax benefits.

Is the Instant Asset Write-Off right for your business?

The IAWO scheme offers a compelling incentive for business owners to replace, upgrade or purchase new assets for their business. There is no limit to the amount that can be claimed using the IAWO, as long as each individual purchase does not exceed the $150,000 threshold. This provides a powerful financial incentive for businesses that are considering upgrading capital equipment.

For more detailed information on last year’s Federal Budget changes, read our Small Business Cheat Sheet on the Federal Budget.

For the impact of the 2019 changes on small business, read this opinion piece by CEO Jamie Osborn.