As we head towards the end of the tax year, many small businesses are looking to get their tax affairs in order and put in place some last minute plans to reduce their tax burdens, writes Mark Chapman.
There are many tips a small business can implement to reduce its taxable profit, including deferring issuing invoices until the new tax year, accelerating expenses payments and even pre-paying some of the next year’s expenses, like insurance policies.
However, a year after it was first introduced, one of the best tax breaks for small business remains the $20,000 instant asset write-off. With many businesses offering End of Financial Year promotions, this is the ideal time for small businesses to take advantage by acquiring some much needed capital assets and, at the same time, reducing their taxable profits.
So, as a quick refresher, what are the key features of the instant asset write-off?
• Businesses can buy any items of machinery or equipment for use in their business, provided the cost of each asset is less than $20,000. This could include motor vehicles, office furniture, items of technology like laptops, mobile phones and tablets, and kitchen equipment.
• It is even possible to claim items like TVs, gym equipment, works of art and computer gaming consoles, provided they are used for business purposes, for instance, in work recreation areas or office receptions. If you’re claiming left-field deductions like these, make sure you keep proper records!
• The write-off is available for all eligible purchases right through until 30 June 2017 but to maximise cash flow benefit, it makes sense to make purchases as close as possible to the end of the financial year. Now is a great time to make that investment!
• Only small businesses can claim the deduction. That means that to qualify, your business needs to have an aggregate annual turnover of less than $2 million.
• Only assets valued at $20,000 or less (excluding GST) qualify for the instant deduction. So, if the value of the asset is greater than $20,000, the asset will be depreciated over a number of years.
• The deduction is available for both new and second-hand assets.
• If multiple items are purchased and each costs less than $20,000, the whole cost of each item can be written off straight away.
• The relief works by reducing your taxable profit by the amount spent. This means that you get relief at either the small companies rate of tax (currently 28.5%) if you run your business through a company, or your personal marginal rate of tax if you are a sole trader or operate through a partnership.
As noted above, the relief is scheduled to expire on 30 June 2017, after which the old rules (which require assets to be written off over their effective lives) will come back into force.
There’s been some lobbying from tax and small business representatives to make the relief permanent but at the time of writing (pre-budget) it isn’t known whether those calls have been heeded. Watch this space!
Mark Chapman is the director of tax communications at H&R Block.