On 2 April 2019, the threshold on the Instant Asset Write-Off (IAWO) scheme was increased to $30,000 from $25,000 in a move to stimulate small to medium enterprise growth. By taking advantage of the scheme, 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 $30,000.
By claiming a deduction for the full value of each asset purchased under $30,000, 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 $50 million.
- The entire cost of the asset must be less than the current $30,000 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 $30,000 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 breakeven 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.
For more detailed information, read our Small Business Cheat Sheet on the Federal Budget.
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 medium sized businesses
Another important aspect of the IAWO scheme is that it now also includes businesses with annual turnover of under $50 million, up from $10 million previously. According to the government, the expansion will cover an additional 22,000 businesses.
These medium 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 $30,000 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.
Working Example: Frank’s joinery business
Frank runs a carpentry/joinery business and has decided to upgrade his existing utility vehicle by purchasing a 2018 Toyota Hilux for $30,000 drive away (i.e. inclusive of GST). Frank was offered $5,000 for his trade-in leaving him with a $25,000 changeover. He signed his purchase contract on 30 April 2019 and intends to take delivery of the vehicle on 1 July 2019. The ute will be used 100% for business and due to excessive mileage, wear & tear, Frank typically changes vehicles every three years. The business operates as a Pty Ltd company and is GST registered. In the 2019/20 financial year, Frank expects his turnover to be approximately $1 million.
- The total purchase price (irrespective of any trade-in) is within the $30,000 threshold.
Frank purchased the asset on 10 April and intends to take delivery on 1 July. Under the IAWO scheme, Frank may be eligible to claim 100% of the total cost of the purchase in the tax year the asset is first used. This means that Frank will need to claim his tax deduction in the 19/20 tax year as the asset is to be delivered on 1 July 2019.
Based on how Frank uses his work vehicle, there is no need to deduct any private usage portion from his calculations.
Frank operates a Pty Ltd company with a current GST registration. That means the total amount he can claim should exclude the GST component of the purchase price. Assuming the amount of GST equates to 1/10th of the purchase price ($27,272.73 x 10% = $2,727.27), Frank is eligible to claim a maximum of $27,272.73 under the IAWO scheme.
Frank’s company turnover meets the eligibility requirements under the IAWO scheme.
What does this mean for Frank?
- In the 2019/20 Financial year, Frank will be able to claim a depreciation tax deduction of $27,272.73 under the IAWO scheme for the purchase of his 2018 Toyota Hilux.
- Based on the current 2019/20 company tax rate of 27.5% for base rate entities with turnover under $50 million, Frank may be able to reduce his company tax bill by $7,500 for the 2019/20 financial year ($27,272.73 x 27.5%).
Comparing IAWO to traditional depreciation methodology
Note that the company tax rate in the years 20/21 is set to decrease to 26% and to 25% in 21/22. Assume disposal after three years.
What are the benefits of the IAWO in this example?
Using the traditional Diminishing Value depreciation methodology and applying the ATO’s 8-year effective depreciable life for motor vehicles, when Frank is ready to dispose of the vehicle after three years, he has claimed a total of $15,767 in depreciation, producing an estimated tax saving of $4,163 over those three years.
Under the IAWO scheme, Frank has been able to claim the full amount of depreciation in the year of purchase, yielding an estimated tax saving of $7,500.
In this scenario, Frank is better off claiming the IAWO for the following reasons:
- Total savings of $7,500 vs. $4,163,36
- Frank receives the $7,500 benefit in the first year of asset use rather than over three years.
- Frank utilises the deduction in the highest tax rate year (19/20) before the corporate tax rate reduces.
Is the Instant Asset Write-Off right for your business?
On face value, the IAWO scheme offers a compelling incentive for small 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 $30,000 threshold.
This provides a powerful financial incentive for small businesses that are considering upgrading capital equipment.
For more information: Instant Asset Write-off Increased and Extended