The end of financial year is rapidly approaching, and thanks to the the Government's 2021 Budget set out earlier this month, tax relief for many businesses under 'Instant Tax Write Off' provisions have been extended. Prior to the Budget announcement, the $150,000 write off threshold (bumped up from $30,000 as part of the Federal Government’s Coronavirus Stimulus Package in 2021) was available for assets purchased until 31st December 2021.
Now, the extended provisions dubbed 'Temporary Full Expensing' allow eligible businesses to fully expense (i.e. write off) asset purchases for the period 6th October 2020 through 30th June 2023. This means that eligible businesses receive a 100% deduction for eligible assets in the financial year they were purchased, rather than depreciating the asset over a number of years, guided by the ATO's determination of it's 'useful working life'. The 100% deduction delivers instant tax relief, and who doesn't love that?
Eligible new depreciating assets with a value up to $150k can be fully expensed by businesses with an annual aggregated turnover under $5b. Eligible second hand assets with a value up to $150k can be fully expensed, by businesses with an annual aggregated turnover under $50m. The asset needs to have been purchased and fully installed and commissioned ready for use within the 6th October 2020 and 30th June 2023 window.
What's the Catch?
There isn't a catch as such, but it is important to remember that the provisions do not represent a cash reimbursement for the assets purchased. Rather, it is a 100% tax deduction, recorded against the taxable income of the business. In reducing the taxable income, the tax payable is thereby reduced. For example, a business with a taxable income of $100k prior to the purchase of a $10k depreciating asset, now has a taxable income of $90k. Assuming a 27.5% tax rate (the current tax rate for company's in Australia), the tax saving is $2,750.
These provisions are specifically designed to increase GDP and can be a timely incentive for businesses to invest in assets that deliver value and support revenue generation. Businesses with reserves or access to low cost financing can astutely leverage cash and/or debt to invest in assets and relieve their tax burden.