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Instant Asset Write-Off

Posted 5 Nov '20

Instant Asset Write-Off

By Christina Cotter

Small Business Month: Tips for Claiming the Instant Asset Write-Off

What is the Instant Asset Write Off?

Under the instant asset write-off, eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.

Instant asset write-off can be used for:

  • multiple assets provided the cost of each individual asset is less than the relevant threshold
  • new and second-hand assets.

Eligibility to use instant asset write-off on an asset depends on:

  • your aggregated turnover (the total ordinary income of your business and that of any associated businesses)
  • the date you purchased the asset
  • when it was first used or installed ready for use
  • the cost of the asset being less than the threshold.

From 12 March 2020 until 31 December 2020 the instant asset write-off threshold amount for each asset is $150,000 excluding GST (up from $30,000).

However, on 6 October 2020, as part of the 2020–21 Budget, the government announced that it will target support to businesses and encourage new investment, in part through a temporary full expensing incentive. Eligible businesses with an aggregated turnover of less than $5 billion will be able to deduct the full cost of new eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between 6 October 2020 and 30 June 2022.

Tips for claiming the Instant Asset Write Off

  • The instant asset write off is not a cash hand-out. It allows you to claim a tax deduction for your asset purchases ‘instantly’ instead of claiming depreciation each year over the life of the asset.

For example, if a company spent $50,000 (excluding GST) on a piece of equipment, then assuming a tax rate of 27.5 percent, the company will receive a $13,750 reduction in tax.

  • The asset must be used or installed ready for use by 30 June to claim the deduction in that financial year. For example, if the asset is purchased on 27 June 2020, but not available for use in the business until 5 July 2020, then the business cannot claim an immediate tax deduction in the 2020 year but is eligible to can claim the deduction in the 2021 year instead.
  • If you run a small business and choose to use the simplified depreciation rules, you must use instant asset write-off on all eligible assets.
  • The immediate deduction for a motor vehicle cannot exceed the cost limit of $57,581 for the 2020 year, $59,136 for the 2021 income year.
  • To work out the amount you can claim, you must subtract any private use portion. The balance (that is the portion you use to earn assessable income) is generally the taxable purpose portion (business purpose portion). While you can only claim the taxable purpose portion as a deduction, the entire cost of the asset must be less than the relevant threshold.
  • Due to these measures small business taxpayers may have accelerated depreciation claims and reduced tax liabilities in the 2020, 2021 and 2022 financial years, however future tax liabilities may be increased as a result.  The immediate write off measure will have an impact on future depreciation claims by reducing the amount of carried forward depreciation deductions available and therefore increasing future tax liabilities.  Also, sale of plant and equipment in the future will result in an increased tax liability. It is important to be aware of these consequences and as always we recommend that tax planning be considered before the end of the financial year so that your tax position can be estimated and you can consider options to minimise the tax outcome if required.

Christina Cotter

Associate




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