|The instant asset write-off for small business entities is a measure that has been around for a number of years, having been increased and extended by the Government a number of times. Earlier this year, legislation was enacted to further increase the write-off to $30,000 and extend its available until 30 June 2020. This same legislation also introduced the write-off for “medium-sized business” for the first time.
While the rules may seem familiar, this latest round of changes provide a reminder that there are subtleties in the rules that business taxpayers advisers should be aware of to ensure that they are validly accessing these concessional rules.
Small business entities (SBEs) may choose to apply the simplified depreciation provisions and calculate deductions for the decline in value of their depreciating assets under Subdiv 328-D of the ITAA 1997 instead of Div 40.
This requires them to:
- pool assets costing $1,000 or more at the rate of 30 per cent (15 per cent in the year the assets are added to the pool) under s. 328-185;
- deduct — as an immediate write-off — the taxable purpose proportion (TPP) of the adjustable value (i.e. generally its cost) of depreciating assets which cost less than $1,000 under s. 328-180.
An entity is a ‘small business entity’ for an income year within the meaning in s. 328-110 of the ITAA 1997 if it carries on a business in that year and:
- it carried on a business in the prior income year and its aggregated turnover was less than $10 million; or
- its aggregated turnover in the current income year is likely to be less than $10 million.
An entity is also an SBE if it carries on a business in an income year and its aggregated turnover for that income year, worked out as at the end of that year, is less than $10 million.
Until the 2015–16 income year, the threshold was $2 million; on 1 July 2016, the threshold increased to $10 million.
In 2015, the Tax Laws Amendment (Small Business Measures No. 2) Bill 2015 amended the tax law to temporarily increase to $20,000 the threshold below which certain depreciating assets and general small business pools could be immediately deducted by SBEs. The temporary increase applied from 7.30 pm (by legal time in the Australian Capital Territory) on 12 May 2015 until 30 June 2017.
While the current instant asset write-off (IAWO) arrangements were introduced in 2015 as a temporary measure to assist small businesses during a period of economic transition and to help counter the risk that the period of economic adjustment would be a protracted one (see paragraph 2.6 of the Explanatory Memorandum to the amending 2019 Bill), the IAWO has been a popular measure and has proven to be beneficial irrespective of economic conditions given the associated cash flow benefits to business.
The tax law was subsequently amended by:
- the Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Act 2017 (enacted on 22 June 2017) which extended by 12 months to 30 June 2018 the period during which SBEs could access the IAWO; and
- the Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Act 2018 (enacted on 21 September 2018) which extended by 12 months to 30 June 2019 the period during which SBEs could access the IAWO.
Following these amendments, the IAWO threshold was to revert to $1,000 from 1 July 2019.
Announcement on 29 January 2019
On 29 January 2019, the Prime Minister, Scott Morrison announced that the Government would increase the IAWO threshold for SBEs from $20,000 to $25,000 and extend the application of the new threshold until 30 June 2020.
The Treasury Laws Amendment (Increasing and Extending the Instant Asset Write-Off) Bill 2019 (‘the Bill’) was introduced into Parliament on 13 February 2019 to give effect to this announcement.
Budget announcement on 2 April 2019
On 2 April 2019, as part of the 2019–20 Federal Budget, the Government announced that it would:
- further increase the threshold below which SBEs can access an immediate deduction for depreciating assets from $25,000 to $30,000; and
- expand the IAWO to make it available to medium-sized businesses in addition to SBEs.
On 3 April 2019, the Bill was amended in the Senate to give effect to the Budget announcement, which necessitated the Bill returning to the House of Representatives to accept the Senate’s amendments. This occurred the following day (which was the final Parliamentary sitting day ahead of the impending Federal election), and the Bill finally passed both Houses on 4 April 2019. The Bill received Royal Assent on 6 April 2019.
At the time of writing this article, the Bill awaits Royal Assent, which is expected in the next few days, before the election is called.
New instant asset write-off arrangements
For small business entities
An entity can claim an immediate deduction for a depreciating asset in an income year under the IAWO for SBEs — contained in s. 328-180 of the ITAA 1997, and its accompanying transitional provision, s. 328-180 of the Income Tax (Transitional Provisions) Act 1997 — if the entity meets all of the following conditions:
- the entity must be carrying on a business in that income year;
- the entity must have an aggregated turnover of less than $10 million as worked out under s. 328-115;
- the asset must cost less than the IAWO threshold (excluding any GST for which input tax credits have been claimed);
- the asset must be acquired on or after 7.30 pm on 12 May 2015 but before 1 July 2020;
- the asset must be first used, or installed ready for use, during the prescribed period (see the table below).
The meaning of ‘acquired’ and ‘first used, or installed ready for use’
The term ‘acquired’ is not defined in the tax law so it takes its ordinary meaning, Generally, an asset is acquired when you buy it under a contract, or if there is no contract, you acquire it in some other way.
Similarly, the term ‘first used, or installed ready for use’ is not defined in the tax law so it also takes its ordinary meaning.
The meaning of aggregated turnover
Annual turnover is worked out under s. 328-115. An entity’s aggregated turnover for an income year is the sum of the annual turnovers of:
- the entity;
- an entity (‘a relevant entity’) that is connected with the entity; and
- an entity (‘a relevant entity’) that is an affiliate of the entity,
with some adjustments.
Annual turnover is worked out under s. 328-120. An entity’s annual turnover for an income year is the total ordinary income that it derives in the income year in the ordinary course of carrying on a business.
Annual turnover excludes:
- GST payable on taxable supplies;
- ordinary income derived from sales of retail fuel; and
- dealings between the entity and a relevant entity, or between a relevant entity and another relevant entity.
The following modifications also apply:
- the arm’s length amount must be used in calculating ordinary income derived from any dealing with an associate; and
- if the entity carried on a business for only part of the income year, calculate a ‘reasonable estimate’ of what the annual turnover would be if the entity carried on a business for the whole income year.
Working out the IAWO threshold
The threshold that applies to an SBE when working out whether it can immediately deduct the cost of an asset is based on two criteria:
- when the asset was acquired; and
- when the asset was first used, or installed ready for use.
In the new provisions:
- 2019 application time means the start of 29 January 2019;
- 2019 budget time means 7.30 pm (by legal time in the Australian Capital Territory, hereafter referred to as simply ‘7.30 pm’) on 2 April 2019.
The IAWO thresholds for SBEs are summarised in the following table.
IAWO thresholds for SBEs
|Date asset first used (or installed ready for use)||Asset acquired
before 7.30 pm
on 12 May 2015
|Asset acquired from 7.30 pm on 12 May 2015 to 30 June 2020||Asset acquired
after 30 June 2020
|Before 7.30 pm on
12 May 2015
|From 7.30 pm on
12 May 2015 to 28 January 2019
|From 29 January 2019 to 7.30 pm on 2 April 2019||$25,000|
|From 7.30 pm on 2 April 2019 to 30 June 2020||$30,000|
|After 30 June 2020||$1,000|
From 1 July 2020, the IAWO threshold reverts to $1,000 for SBEs.
For medium-sized businesses
A medium-sized business can claim an immediate deduction for a depreciating asset in an income year under the IAWO — contained in new s. 40-82 of the ITAA 1997 (see Schedule 2 to the Bill) — if it meets all of the following conditions:
- the entity is not an SBE for that income year;
- the entity would be an SBE for that income year if the SBE aggregated turnover threshold was $50 million instead of $10 million — i.e. its aggregated turnover, as worked out under s. 328-115, is at least $10 million but less than $50 million;
- the asset must cost less than the $30,000 IAWO threshold that applies to medium-sized businesses (excluding any GST for which input tax credits have been claimed);
- the asset must be both acquired and first used, or installed ready for use, on or after 7.30 pm on 2 April 2019 but before 1 July 2020.
Working out the aggregated turnover of a medium-sized business
A medium-sized business will need to work out its turnover in the same way as an SBE does, that is, by taking into account both the turnover of the current income year and the previous income year.
If in either year the turnover is less than $50 million (but at least $10 million, otherwise it would already be an SBE), then the medium-sized business will be able to claim an immediate deduction (subject to the asset costing less than $30,000 and being acquired/first used within the prescribed period).
Accordingly, an entity will be eligible to access the IAWO if it carries on a business during an income year and at least one of the following applies:
- the aggregated turnover of the entity for the current income year is $10 million or more (that is, it exceeds the threshold to be an SBE) but less than $50 million;
- the aggregated turnover of the entity in the prior income year was $10 million or more but less than $50 million; or
- at the beginning of the current income year, the aggregated turnover of the entity for the current income year is likely to be $10 million or more but less than $50 million.
However, an entity is not eligible to access the IAWO on the basis of its likely turnover if it has carried on business in the two previous income years and its aggregated turnover for each of those years was $50 million or more.
The (less than) $50 million aggregated turnover threshold that applies to medium-sized businesses for the purpose of the IAWO also applies for the purpose of s. 23AA of the Income Tax Rates Act 1986 which determines whether a company is a base rate entity which determines whether it is eligible for the lower corporate tax rate of (currently) 27.5 per cent.
However, the further calculation that is required by s. 23AB of the Income Tax Rates Act 1986 to work out whether the company has base rate entity passive income of more than 80 per cent of its assessable income is not relevant to whether a medium-sized business can claim an immediate deduction under the IAWO.
Accordingly, it is possible that a company with an aggregated turnover of at least $10 million but less than $50 million acquires an asset which:
- meets the conditions in new s. 40-82, permitting the company to claim an immediate deduction for the asset under the new measures, notwithstanding that the company may not be a base rate entity — because its base rate entity passive income is more than 80 per cent of its assessable income — and therefore its corporate tax rate is 30 per cent;
- does not meet the conditions in new s. 40-82, preventing the company from claiming an immediate deduction for the asset under the new measures, notwithstanding that the company is a base rate entity — because its base rate entity passive income is no more than 80 per cent of its assessable income — and therefore its corporate tax rate is 27.5 per cent.
IAWO thresholds for medium-sized businesses
|Asset acquired or first used
(or installed ready for use) before 7.30 pm on 2 April 2019
|Asset acquired and first used (or installed ready for use) from 7.30 pm on 2 April 2019 to 30 June 2020||Asset acquired or first used
(or installed ready for use) after 30 June 2020
|Usual rules in Div 40 apply||$30,000 IAWO threshold available
Usual rules in Div 40 apply for asset costing $30,000 or more
|Usual rules in Div 40 apply
No $1,000 IAWO threshold available
The provisions for the new $30,000 IAWO are constructed to direct:
(a) SBEs to s. 328-180 (as amended) of the Income Tax (Transitional Provisions) Act 1997; and
(b) medium-sized businesses (aggregated turnover of at least $10 million to less than $50 million) to new s. 40-82 which is contained within Div 40.
From 1 July 2020, medium-sized businesses will need to work out their asset’s decline in value under the ordinary depreciation provisions in Div 40 (see new s. 40-82(5). The $1,000 IAWO threshold which will continue to be available to SBEs from 1 July 2020 will not be available to medium-sized businesses.
The amendments also:
- increase the threshold below which amounts that are included in the second element of an asset’s cost can be immediately deducted; and
- extend the period for which the operation of the five-year ‘lock-out’ rule is modified (see below).
Five-year lock-out rule modified
Under the lock-out rule arrangements, s. 328-175(10) provides that an SBE that elects for Subdiv 328-D to apply for an income year but then chooses not to apply those provisions in a later income year cannot apply the small business capital allowance provisions for a period of five income years from the first later year in which the entity could have made the choice (this is referred to as the ‘lock-out rule’).
As originally legislated in 2015
Under transitional rules, SBEs are not required to apply the lock-out rule to increased access years i.e. income years that end on or after 12 May 2015 but on or before 30 June 2017. Accordingly, this means that SBEs which balance on 30 June can opt back into applying Subdiv 328-D to access the IAWO during the 2014–15, 2015–16 and 2016–17 income years. The lock-out rule starts to apply again from the first income year that ends after 30 June 2017.
The lock-out rule applies from the first income year that ends after 30 June 2017. In determining whether the lock-out rule applies after 30 June 2017, the income years preceding the increased access years are disregarded.
Prior to these latest amendments, the operation of the lock-out rule was modified (twice) for income years that ended on or after 12 May 2015 but before 1 July 2019 (the increased access years referred to above).
The latest amendments further extend the period for which the operation of the lock-out rule is modified. The modifications now apply for income years that end on or after 12 May 2015 but before 1 July 2020. For most SBEs, this results in one further increased access year.
A choice by an SBE not to use the rules in Subdiv 328-D in the 2019–20 income year will lock them out of the rules until the 2025–26 income year. Accordingly, careful consideration should be given to any choice made in the 2019–20 income year.
Questions have often arisen in relation to the temporary increase in the IAWO threshold, so the common questions are answered below.
Is an asset acquired by an SBE before 7.30 pm on 12 May 2015 or after 30 June 2020 eligible for the temporarily higher IAWO?
No, an asset is eligible for the temporarily higher IAWO only where it is acquired by an SBE on or after 7.30 pm on 12 May 2015 and before 1 July 2020, and it is first used, or installed ready for use:
- where the asset costs less than $20,000 — on or after 30 pm on 12 May 2015 and before 29 January 2019;
- where the asset costs less than $25,000 — on or after 29 January 2019 and before 30 pm on 2 April 2019;
- where the asset costs less than $30,000 — on or after 30 pm on 2 April 2019 and before 1 July 2020.
Is an asset acquired by a medium-sized business before 7.30 pm on 2 April 2019 or after 30 June 2020 eligible for the temporary IAWO?
No, an asset is eligible for the temporary IAWO only where it cost less than $30,000 and it is acquired and first used, or installed ready for use, by a medium-sized business on or after 7.30 pm on 2 April 2019 and before 1 July 2020.
Can I claim the first $20,000 (or $25,000 or $30,000) of any asset I buy?
No, the IAWO is available only if the cost of the asset was less than the IAWO threshold of $20,000 $25,000 or $30,000 depending on the acquisition date and the date it was first used or installed ready for use.
If the asset cost an amount equal to or more than the IAWO threshold, the asset must be:
- placed in a pool by the SBE (unless the SBE chooses not to apply the simplified depreciation rules in Subdiv 328-D in which case it will need to work out the asset’s decline in value under Div 40);
- depreciated under the usual rules in Div 40 if the entity is a medium-sized business.
Can I choose the IAWO for assets I buy under the threshold but not pool those assets which are equal to or more than the threshold?
No, if an SBE chooses the simplified depreciation rules in Subdiv 328-D, which includes the IAWO, they must adopt all of the rules in that subdivision. It is not possible to choose the IAWO for a $15,000 asset but choose to depreciate a $40,000 asset under Div 40 instead of pooling it.
Entities cannot cherry pick from the provisions they want and those they don’t. Entities have a choice whether they apply Subdiv 328-D instead of Div 40 (assuming they are eligible to do so) but they cannot choose to adopt some elements of Subdiv 328-D and exclude others.
Can I choose the IAWO for some assets under the threshold and not others?
No, if an SBE chooses to apply the simplified depreciation rules in Subdiv 328-D, they must immediate deduct all assets that cost less than the IAWO threshold (of $1,000 $20,000, $25,000 or $30,000 depending on the acquisition date and the date it was first used or installed ready for use).
Can I claim the IAWO for all depreciable assets?
No, some assets such as horticultural plants and in-house software remain ineligible for the IAWO as deductions for their decline in value are unable to be worked out under Subdiv 328-D.
Taxpayers who use assets to carry on a primary production business (other than horticultural plants) may choose to deduct amounts for those assets under Subdivs 40-F or 40-G or calculate their deductions under Subdiv 328-D.
Can I reduce the asset’s cost by a trade-in or non-taxable use to get under the threshold?
No, when measuring the asset’s cost against the IAWO threshold, you must use the cost of the asset before applying any trade-in value or reducing the deductible amount for any non-taxable use.
|An SBE acquired an asset costing $30,800 including GST during the prescribed period when the $30,000 IAWO threshold applies. The asset will be used 75 per cent for a taxable purpose. Is the entity eligible for the IAWO for this asset?
$30,800 cost less $2,100 input tax credit
= $28,700 × 75% TPP
= $21,425 deduction IAWO available
|If instead the asset cost $35,200 including GST (assume the same taxable purpose proportion as above), is the entity eligible for the IAWO for this asset?
$35,200 cost less $2,400 input tax credit
= $32,800 × 75% TPP
= $24,600 IAWO not available, TPP of asset’s value must be pooled
Do grouping rules apply if I buy multiple identical assets?
No, there are no asset grouping rules that apply when claiming an immediate deduction under these arrangements. The IAWO threshold applies per asset.
Do grouping rules apply in determining the entity’s aggregated turnover?
Yes, the annual turnovers of relevant entities, namely entities that are:
- connected with the entity; and
- affiliates of the entity,
are included in working out the aggregated turnover of the entity. Remember that annual turnover comprises only ordinary income derived in the ordinary course of carrying on a business.
Can I claim the IAWO if I am an employee?
No, the IAWO is available only to entities that are SBEs (within the meaning of s. 328-110) or medium-sized businesses (that meet the conditions in new s. 40-82).
Can I claim the IAWO if I derive personal services income?
The impact of the personal services income (PSI) rules on the capital allowance rules can be summarised as follows:
Conducting a personal services business
- An individual or personal services entity (i.e. a company, trust or partnership) that derives PSI and which meets one of the four personal services business (PSB) tests or has a PSB determination in force is taken to be conducting a PSB, so they will be entitled to access the simplified depreciation provisions in Subdiv 328-D which includes the IAWO, provided they meet the SBE turnover conditions.
Not conducting a personal services business
- An individual who derives PSI directly and who is not conducting a personal services business (PSB) will not be entitled to deductions for business expenses if the individual would not be able to claim those deductions as an employee. This means an individual’s deductions for business expenses will ordinarily be denied where the individual does not pass one of the four PSB tests or have a PSB determination in force.
- In contrast, a personal services entity which derives PSI may be entitled to business deductions if it receives the PSI and is carrying on a business even though it does not meet one of the four PSB tests or have a PSB determination in force. In these circumstances, the PSE must determine whether the individual would be entitled to a deduction had the individual incurred the business expense and been carrying on the business.
What happens when I sell the asset?
If the asset was pooled, a balancing adjustment event (see s. 40-295) occurs when the asset is sold (because the taxpayer ceases to be the holder of the asset). The SBE is required to reduce the value of the pool by the TPP of the asset’s termination value. If the pool value is reduced to below zero, the excess is included in the taxpayer’s assessable income under s. 328-215.
If the asset was immediately deducted under the IAWO, the SBE is required to include the TPP of the asset’s termination value in their assessable income under s. 328-215.
How is a change in the use of the asset dealt with?
When an SBE adds an asset to the pool (because its cost is equal to or more than the IAWO threshold), only the asset’s TPP is included in the pool.
Each year the SBE is required under s. 328-225 to re-estimate the TPP of the use of the asset and make an adjustment for the present year if the estimate differs from the original estimate (or previous estimate requiring an adjustment) by more than 10 percentage points. This adjustment is made to the opening pool balance prior to calculating the deduction for the pool for the income year.
Can an SBE always write-off the pool value if its balance at the end of the year is less than $20,000 (or $25,000 or $30,000)?
Closing pool balance
Under s. 328-200, the closing pool balance at the end of an income year is:
the opening balance:
(i) plus (+) the TPP of new assets allocated to the pool;
(ii) plus (+) any amounts included in the second element of cost of a depreciating asset;
(iii) less (–) the TPP of assets allocated to the pool for which a balancing adjustment event occurred;
(iv) less (–) the decline in value deduction(s) claimed for the pool.
Low pool value
However, in determining whether the pool has a ‘low pool value’ at the end of an income year which is claimed as a deduction under s. 328-210 if it is below the IAWO threshold, the balance is instead calculated as follows:
the opening balance:
(i) plus (+) the TPP of new assets allocated to the pool;
(ii) plus (+) any amounts included in the second element of cost of a depreciating asset;
(iii) less (–) the TPP of assets allocated to the pool for which a balancing adjustment event occurred.
If the ‘low pool value’ is less than the IAWO threshold at the end of that income year, it must be claimed as a deduction. The increased threshold of $30,000 applies to income years that end on or after 2 April 2019 but before 1 July 2020. Thereafter, it reverts to $1,000. This is summarised in the table below.
The low value calculation does not take into account any decline in value of the assets. Also, the deduction under s. 328-210(2) where the pool has a low pool value is mandatory i.e. there is nothing in the section that refers to the taxpayer being able to choose to deduct their low pool value balance or continue claiming a 30 per cent deduction each year.
|Income year||Threshold against which the ‘low pool value’ is compared|
|2014–15 to 2017–18||$20,000|
Will the ATO pay me $20,000 (or $25,000 or $30,000)?
No! The IAWO is an immediate deduction for the cost of eligible assets for the decline in value which would ordinarily be claimed over their effective lives in the form of depreciation. The increased IAWO threshold merely provides a timing advantage i.e. bringing forward a deduction that the SBE would have received anyway.
The IAWO is not a rebate, an offset or any other form of a refund of tax, and the ATO will not be sending any payments of $20,000, $25,000 or $30,000 to entities that claim the IAWO.
While the new IAWO will continue to be popular with businesses, it pays to remember that tax outcomes should never be the main driver of commercial purchasing decisions. Businesses should not purchase equipment or vehicles they don’t need just to secure an immediate deduction for the purchase price. Why spend $10,000 to get a $3,000 deduction unless you actually need the asset for your business?
As welcome as the new arrangements are, this is now the third time the government has extended the IAWO — from originally 30 June 2017 to 30 June 2018, then to 30 June 2019, then to 30 June 2020.
To provide certainty to business taxpayers, it would be even more pleasing to see the IAWO legislated as a permanent feature of the tax law, providing an ongoing immediate deduction for the cost of purchasing depreciating assets up to a prescribed threshold … preferably larger than $1,000.
TaxBanter Pty Ltd.