Rather than having to claim depreciation of assets over a period of years, the Federal Government has announced a full asset write-off scheme, also known as temporary full expensing, to fast-track business growth and economic recovery post COVID-19.
The Federal Government first announced an increase to the threshold for the instant asset write-off scheme in March this year, boosting the benchmark from $30,000 to $150,000. This was included as part of the Federal Government’s Coronavirus stimulus package and was originally due to end on 31 December 2020.
However, the recent budget announcement revealed that a new version of the scheme will live on until 30 June 2022. Millions of Australian business owners are now able to deduct the full amount of any eligible depreciating business assets. This means eligible small business owners have an extra incentive to invest in expanding and improving their businesses.
This new scheme is forecast to cost $26.7 billion and was passed in Parliament shortly after it was announced on Budget night.
What’s a depreciable asset, anyway?
Depreciable assets are items that lose value over time, for example motor vehicles, machinery, computers, POS systems, coffee machines, etc.
During the recent Federal Budget announcement, Treasurer Josh Frydenberg gave examples of such depreciating assets when he said, “A trucking company will be able to upgrade its fleet, a farmer will be able to purchase a new harvester and a food manufacturing business will be able to expand its production line.”
According to the Australian Tax Office, land and items of trading stock (things your business manufactures/acquires to sell or exchange) are not considered to be depreciable assets. For more information on depreciating assets, you can visit the ATO’s website.
What the scheme looks like in action
To put some real-life context around this new scheme, here are two examples of how businesses could take advantage of it:
Technology – imagine you’re running a medical service with a turnover of $200 million for the 2021-22 income year. You want to create a new medical database, so you engage a software company that tells you it will cost $400,000 (excluding GST).
If the new temporary full expensing scheme didn’t exist, you could claim a tax deduction of $80,000 for the database system for the 2021-22 income year. You could then claim the depreciating value of the asset over future years.
However, under this new scheme, you can instead claim a tax deduction of the full $400,000 in 2021-22 if you installed and used the database before 30 June 2022.
In this circumstance, you’d end up paying a whopping $96,000 less in tax on this item for the 2021-22 income year.
Agriculture – say you own an agricultural company with an annual turnover of $20 million in the 2021-22 income year. If you purchased a $600,000 harvester (excluding GST) on 1 July 2021, and temporary full expensing didn’t exist, you’d only be able to claim a total tax deduction of around $180,000 for the 2021-22 tax year, with the remainder of the cost being depreciated over future years.
However, under the temporary full expensing scheme you can claim the full $600,000 that you paid for the harvester in 2021-22. Pair this with the new 2021-22 small to medium business 25% tax rate and you’re saving yourself around $105,000 come tax time in 2021-22.
The examples above are taken from the Federal Government’s budget tax fact sheet. For the most current and complete information on Government initiatives, please refer to the relevant Government website.
