Federal Budget 2020: Businesses big and small can now write off any expense, at any cost

Any business making up to $5 billion can now write off any eligible expense immediately, in a complete transformation and expansion of the Instant Asset Write-off scheme.

The Federal Government announced that any business earning up to that amount can write off eligible expenses, at any cost, until June 2022.

The measure will apply to eligible assets purchased from 7:30pm (AEDT) on 6 October 2020 and first used or installed by 30 June 2022. The cost of improvements to existing eligible depreciable assets made during this period can also be deducted in full.

Referred to as ‘temporary full expensing’, the Government estimates 3.5 million businesses will be eligible for the scheme in a move set to encourage spending among businesses.

How temporary full expensing work?

Any business earning up to $5 billion can write off the full cost of any depreciable asset purchased between 6 October 2020 and first used or installed by 30 June 2022.

There are some extra changes and details to be aware of:

• Full expensing in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets
• For small and medium sized businesses (with aggregated annual turnover of less than $50 million), full expensing also applies to second-hand assets
• Businesses with aggregated annual turnover between $50 million and $500 million can still deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31 December 2020 under the enhanced instant asset write-off
• Businesses that hold assets eligible for the enhanced $150,000 Instant Asset Write-off will have an extra six months, until 30 June 2021, to first use or install those assets

What did the Government say about the move to temporary full expensing?

This is the second expansion of the limit in just this year alone. In March, the Government already increased the eligible amount for each asset up to $150,000 from $30,000. Now, the Government says there is no limit on asset prices.

“From tonight, over 99 percent of businesses will be able to write off the full value of any eligible asset they purchase for their business,” Treasurer Josh Frydenberg announced in his budget speech tonight.

“A trucking company will be able to upgrade its fleet, a farmer will be able to purchase a new harvester and a food manufacturing business will be able to expand its production line.”

Other eligible assets include computers, tablets, tools for use on a work site such as drills, ladders, tool boxes, equipment like a fridge or a grill, phones, point of sale systems, or anything else that is used in the running of a business.

The same rules apply to the previous Instant Asset Write-off scheme, which has been well received by small and large businesses alike.

How to claim an asset properly (what we know so far)

As we’ve shared before, businesses need to follow certain rules to make sure they can claim the cost of any asset.

The asset needs to be purchased and installed within the time period the Government specifies – in this case, from 6 October 2020 up to June 2022. It needs to be ready for use – you can’t just have it lying around and then plan to install it a couple of years from now.

The increase is another reason why it’s so important for businesses to have their expense tracking and documentation under control.

Here are some tips we’ve prepared on how to make sure you claim an asset correctly. Keep in mind, these details my change as this is based on past eligibility criteria:

• You have to be in business to claim the Instant Asset Write-Off – having an ABN is not enough
• This tax break is not a cash hand-out, but a deduction that reduces your taxable profit. If you operate as a company and spend, say, $40,000 on a capital purchase (net of GST), then assuming a tax rate of 27.5 percent, the company will receive a 27.5 per cent deduction, which equates to a $11,000 reduction in tax. This means that the company will still have a net cash outlay of $29,000 on this purchase
• The asset must be used, or installed ready for use by 30 June 2022. This is particularly important if the business purchases the asset just before the end of the financial year. For example, if the asset is purchased, say, on 29 June 2022, but not available for use in the business until 7 July 2022, then the business loses the entitlement to claim an immediate tax deduction for the asset
• Don’t forget to pro-rate the deduction for private use – to claim the full deduction, the asset has to be used solely for business purposes. If you operate as a sole trader or in a partnership and there has been some personal use of the asset, the deduction needs to be pro-rated to reflect this
• The deduction is not pro-rated where you operate as a company or a family trust, but fringe benefits tax (FBT) may apply to the private use of the asset by employees (FBT on company cars is a common example).