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Small Businesses Must Plan for Income Tax on Buying and Selling Assets from 1 July 2023

Article By Jeff Little | | Accounting & Tax

Since COVID, small business has been able to claim an immediate 100% write-off for the full cost of depreciating assets. With this temporary measure coming to an end on 30 June, the instant asset write-off threshold will be reintroduced from 1 July 2023 which could create unexpected tax liabilities for you. This article will explore the details of these changes and their implications for small business owners.

Temporary Full Expensing Ending June 2023: What does it mean for you?

First, let’s talk about the temporary full expensing measure that’s been giving businesses a boost. This provision has allowed eligible businesses to claim an immediate 100% write-off for the full cost of assets. It’s been a handy tool for stimulating investment and giving you a tax advantage during challenging economic times. However, this has only been a timing benefit that brings forward the deduction and is now set to end on 30th June 2023.

Enter: The Instant Asset Write-Off Threshold

Before you start worrying about losing out on those benefits, let me introduce you to the instant asset write-off threshold! Announced in the Federal Budget, the $20,000 threshold will be reintroduced from 1t July 2023 to 30 June 2024.

So, what exactly does the instant asset write-off threshold mean for you? Well, if your business has an aggregated annual turnover of less than $10 million (and let’s face it, most small businesses fall into this category), you’ll be able to take advantage of an immediate deduction for the total cost of eligible assets valued at less than $20,000 using simplified depreciation rules. All assets over this threshold will be subject to depreciation at 15%/30% in the small business pool. Prior to COVID, the same rules were in place, with the threshold set at $30,000.

Proceed with caution after 1 July! Consider the tax implications!

From 1 July, the ATO is effectively pushing back the timing of deductions for assets over $20,000. Businesses selling assets need to ensure it understand the tax liability that will come.

Selling an existing asset

If an asset has been full deducted, it means the sale proceeds are 100% taxable. For a company that’s 25% tax.

Example 1: Altitude Pty Ltd purchased equipment for $200,000 and has already fully deducted this under the temporary full expensing rules. In August 2023, it sells the equipment for $120,000. The sale proceeds are taxable income at the 25% company tax rate, resulting in a $30,000 tax liability in the 2024 tax return.

Trading in to purchase a new asset

If a business buys a replacement asset, under the small business pool rules, the immediate tax liability is avoided but ongoing depreciation deductions are reduced.

Example 2: In August 2023, Altitude Pty Ltd purchases new equipment for $300,000. Using, simplified business depreciation, the asset is pooled and a deduction for $45,000 (15%) is claimed in the 2024 tax return with the balance of $255,000 carried forward. Altitude Pty Ltd also sells equipment for $120,000 that was fully deducted per example 1. No tax is immediately payable on this sale in the 2024 tax return, however, the pool balance carried forward for depreciation will be reduced from $255,000 to $135,000, reducing tax deductions in future years.

Small business owners, need to ensure tax liabilities are understood and budgeted for. An unexpected tax bill following lodgement of the 2024 tax return for any business can be a stress for business cashflow. By being aware of the rule changes and planning ahead, you can make strategic financial decisions that support your growth and pave the way for even greater success.