Although the dust is still settling after the Federal Budget for 2020, Parliament hasn’t wasted any time getting the Budget measures through. Legislation passed Thursday 9th October with no changes to announced measures.
Businessowners can start planning around the new budget measures, one of those being another change/extension to the “instant asset write-off” provisions.
While we have seen several years of ongoing “temporary” asset write-off provisions for small business, the latest version is the most favourable to date. Businesses eligibility has increased from small businesses with an annual turnover of $10 million, to include medium and large businesses with an annual turnover up to $5 billion.
Under the new rules, an eligible business can claim an immediate tax deduction for the full cost of acquiring any eligible depreciable asset if:
- The asset was acquired after 7:30pm 6th October 2020 (budget night)
- The asset is installed ready for use, or first used, prior to 30 June 2022
Immediate tax deduction on motor vehicles remains capped at the $59,136 vehicle cost limit.
Purchasing assets is usually associated with cash outflows. This, tied to current business confidence, may leave business owners feeling like they can’t take advantage of the rule change. However, if financing the purchase is an option, the immediate write off rules can mean that the asset purchase may be cash flow positive for at least the first part of the ownership period.
EXAMPLE 1/ CASH PURCHASE OF EQUIPMENT
Company A Pty Ltd with an annual turnover under $50 million, purchases $220,000 (incl GST) in new equipment on 12 October 2020. Cashflow for the business would be as follows:
| Upfront Cash Payment | ($220,000) |
| Add: GST refund in Dec 2020 BAS | $20,000 |
| Add: Income Tax Saved in 2021 Tax Return (26.0%) | $52,000 |
| Total Year 1 Net Cash Outflow for Equipment | ($148,000) |
Company A Pty Ltd has saved $72,000 in cashflow upon lodgement of the BAS and Tax Return. Cash is tight for many businesses, but good businesses could finance the purchase as in example 2.
EXAMPLE 2/ FINANCE PURCHASE OF EQUIPMENT
Company A Pty Ltd with an annual turnover under $50 million, purchases $220,000 (incl GST) in new equipment on 12 October 2020 with finance. Based on a 4-year loan at 5.00%p.a. with $nil balloon payment, monthly repayments would be $5,066. As a result, cashflow for the business would be as follows:
| Year 1: | |
| Upfront Cash Payment | $0 |
| Add: GST Refund in Dec 2020 BAS | $20,000 |
| Add: Income Tax Saved in 2021 Tax Return (26%)* | $52,000 |
| Less: 12 Monthly Repayments | ($60,797) |
| Add: Income Tax Saved From Interest Deduction | $2,559 |
| Total Year 1 Net Cash Inflow for Equipment | $13,762 |
| Year 2: 12 Monthly Repayments After Interest Tax Saving | ($58,915) |
| Year 3: 12 Monthly Repayments After Interest Tax Saving | ($59,628) |
| Year 4: 12 Monthly Repayments After Interest Tax Saving | ($60,378) |
| Total Net Cash Outflow Over 4 Years: | ($165,159) |
Company A Pty Ltd is cashflow positive in Year 1 due to the new business asset write-off. This gives the business 12 months to utilise the equipment and grow business profit to cover the repayments of $1,150 per week over years 2-4.
*for an income tax cash saving, the deduction must offset taxable profit in the current year or profits in prior years under the new loss carry back provisions.
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