Claim a $20,000 Tax Deduction in the 2024FY

The Australian Government’s decision to increase the instant asset write-off threshold from $1,000 to $20,000 for the 2023-24 financial year brings significant advantages for small businesses. This article will delve into the implications of this change, eligibility criteria, and strategic considerations for small business owners.

What is the Instant Asset Write-Off?

The instant asset write-off allows eligible small businesses to claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use. This can significantly improve a business’s cash flow by allowing immediate deduction instead of depreciating the asset over several years.

Benefits of the Increased Threshold

The increase from $1,000 to $20,000 means that small businesses can now immediately deduct assets costing less than $20,000. This provides a significant cash flow advantage by reducing the taxable income of the business entity. However, it’s important to note that the deduction is not a refund; it only reduces taxable income or creates a tax loss to be carried forward to future years.

For instance, if your business operates through a company structure, the economic benefit of the write-off is limited to the relevant company tax rate (25% for base rate entities, 30% for other companies). Therefore, if your business is likely to make a tax loss for the year, a larger deduction might not provide any short-term benefit.

Eligibility Criteria

Eligibility for the instant asset write-off depends on both the business entity and the asset itself.

Business Entity Requirements

To utilise the instant asset write-off, your business must:

• Be carrying on a business under general principles in the 2024 income year.
• Have an aggregated annual turnover of less than $10 million (including the annual turnover of any connected business entities or affiliates) in the 2024- or 2023-income year.
• Choose to apply the simplified depreciation rules for the 2024 income year. If your business does not choose to apply these rules, it will not have access to the instant asset write-off, regardless of whether the other conditions are met.

Asset Requirements

For an asset to be eligible for the instant asset write-off, it must:

• Fall within the scope of the depreciation provisions. Some assets, like horticultural plants, capital works (building construction costs, etc.), and assets leased to another party on a depreciating asset lease, do not qualify.
• Cost less than $20,000. If your business is registered for GST, the cost of the asset needs to be less than $20,000 after GST credits have been subtracted. If your business is not registered for GST, the cost is $20,000 including GST.
• Be first used, or installed ready for use, for a taxable purpose between 1 July 2023 and 30 June 2024. This prevents businesses from stockpiling purchases and claiming tax deductions for goods they have no intention of using in the short term.
• Be for a business use. Ensure there is a relationship between the asset purchased and how your business generates income. For example, a business cannot claim deductions for multiple television sets if the sets have no relevance to the business.

Managing Assets Costing More Than $20,000

If your business is a small business entity and chooses to apply the simplified depreciation rules, then assets costing $20,000 or more can be placed into the small business general pool and depreciated at 15% in the first income year and 30% each income year thereafter. The increased instant asset write-off threshold means that a $20,000 threshold applies for determining whether the full pool balance is written off in the 2024 income year.

Number of Assets and Cash Flow Considerations

The write-off threshold applies per asset, allowing small business entities to deduct the full cost of multiple assets. As long as all other conditions are met, an immediate deduction should be available for each individual item costing less than $20,000. However, businesses must be mindful of their cash flow when making multiple purchases.

Second-Hand Goods

The instant asset write-off does not differentiate between new and second-hand goods. For example, second-hand machinery may qualify if it meets the other requirements.

Extension Until 30 June 2025

In the 2024-25 Federal Budget, the Government announced an extension to the increased instant asset write-off threshold to 30 June 2025. A Bill is currently before Parliament to enact this change.

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Conclusion

The increased instant asset write-off threshold offers small businesses a valuable chance to boost cash flow and invest in essential assets. However, understanding the eligibility criteria and strategic implications is crucial for maximizing these benefits. Navigating the complexities of tax regulations can be challenging, and making informed decisions about asset purchases requires specialised knowledge and expertise.

If you have any questions or need assistance in navigating the instant asset write-off and other tax planning strategies, contact the business tax specialists at Investax. At Investax, our team of specialist accountants is dedicated to helping small businesses like yours optimise their tax strategies and achieve financial success. Our in-depth understanding of tax laws and years of experience ensure that you not only comply with regulations but also maximise the available tax benefits. Contact Investax today to learn how our expert guidance and personalized strategies can help your business thrive

Reference

ATO – Instant Asset Write Off