Posted on March 31, 2020
So, your business has a turnover under $2 million and you want to know how to use the $20,000 immediate tax deduction that’s been all over the news?
Before you start spending, there are a few things you need to know.
Does your business make a profit?
Deductions are only useful to offset against tax. If your business makes a loss then a tax deduction is of limited benefit because you’re not paying any tax. Losses can often be carried forward into future years but you lose the benefit of the immediate deduction.
Small businesses with a turnover of $2m or below make up 97.5% of all Australian businesses. The latest Australian Taxation Office (ATO) statistics show that well under half of these businesses paid net tax. That means that the $20,000 instant asset write-off is useful to less than half of the Australian small businesses targeted.
So, if your business makes a loss and you start spending to take advantage of the immediate deduction, all you are likely to do is to increase the size of your losses with no corresponding offset.
Immediate deduction not yet law
The $20,000 instant asset write-off is not yet law. The ATO only has the capacity to assess on current law not announcements. Don’t forget that many of last year’s Budget measures have not been enacted. While we think it is highly unlikely that the other political Parties will block this measure, there is always a small risk that things will change. So don’t spend more than your business can afford.
Cashflow is more important than an immediate deduction. Assuming your business qualifies for the deduction, the most important consideration is your cashflow. If there are purchases and equipment that your business needs, that equipment has an immediate benefit to the business, and your cashflow supports the purchase, then go ahead and spend the money. The $20,000 immediate deduction applies as many times as you like so you can use it for multiple individual purchases.
But, your business still needs to fund the purchase for a period of time until you can claim the tax deduction and then, the deduction is only a portion of the purchase price.
Let’s take the example of a small bakery. The bakery is in a company structure and has a taxable income for 2014/2015 of $49,545. The owner purchases a new $13,750 oven on 2 June 2015 and installs it straight away. The cost of the oven is claimed in the bakery’s 2014/2015 tax return resulting in a tax deduction of $13,750. So, for the $13,750 spent on the oven, $4,125 is returned as a reduction of the company’s tax liability (i.e., 30% company tax rate in the 2015 income year). For the bakery, they need the cashflow to support the $13,750 purchase until the businesses tax return is lodged after the end of the financial year. With the $4,125 reduction of the company’s tax liability, the business has fully funded the remaining $9,625.
From 1 July 2015, the bakery would also receive the small business company tax cut of 1.5%. If the business also had taxable income of $49,545 in the 2016 income year, the tax cut would provide a reduction of $743.
It’s important not to rely on the advice of the person you are purchasing from. There is a lot of misinformation out there in the market right now and it’s important to know how the concessions apply to you.
Is your business eligible
To use the instant asset write-off, your business needs to be eligible. The first test is that you have to be a business – not just holding assets for investment purposes.
The second is the aggregated turnover of your business needs to be below $2m. Aggregated turnover is the annual turnover of the business plus the annual turnover of any “affiliates” or “connected entities”. The aggregation rules are there to prevent businesses splitting their activities to access the concessions. Another entity is connected with you if:
What has changed?
In general, a deduction is available for purchases your business makes. What has changed for small businesses under $2m turnover is the speed at which they can claim a deduction. Before the Budget announcement, small business could immediately deduct business assets costing less than $1,000. On Budget night, the Treasurer announced that the threshold for the immediate deduction will increase to $20,000 at 7.30pm, 12 May 2015 for small businesses with an aggregated turnover less than $2 million. The increased threshold is intended to apply until 30 June 2017.
For small business, assets above $20,000 can be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter.
If your business is registered for GST, the cost of the asset needs to be less $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price. If your business is not registered for GST, it is the GST inclusive amount.
How do I make the most of the immediate deduction?
There are a few tricks to applying the instant asset-write off:
Second hand goods are ok
It does not matter if the asset you are buying for your business is new or second hand. So, you could still claim the deduction on say, second hand machinery you have bought.
What is not included
There are a number of assets that don’t qualify for the instant asset write off as they have their own set of rules. These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.
Also, you need to be sure that there is a relationship between the asset purchased by the business and how the business generates income. For example, four big screen televisions are unlikely to be deductible for a plumbing business.
Assets must be ready to use
If you use the $20,000 immediate deduction, you have to start using the asset in the financial year you purchased it (or have it installed ready for use). This prevents business operators from stockpiling purchases and claiming tax deductions for goods they have no intention of using in the short term.
Business and personal use
Where you use an asset for mixed business and personal use, the tax deduction can only be claimed on the business percentage. So, if you buy an $18,000 second hand car and use it 80% for business and 20% for personal use, only $14,400 of the $18,000 can be claimed.
How the rules work with trade-ins
If a new car costs $25,000 and the car yard offers to trade in your old car for $6,000, will that result in a vehicle that comes in under the $20,000 threshold for immediate write-off?
This is most likely not going to be the case. Based on the current law and how that operates, we don’t believe it would be possible to claim that $19,000 as an immediate write-off. The way the law is constructed at the moment tells us that the value of that vehicle is still $25,000, made up of $19,000 cash plus $6,000 as a non-cash value, in this case being the trade-in.
Posted on March 31, 2020
Many clients claim tax deductions for the travel between home and work if they transport bulky tools and equipment required for their work.
This deduction is now on the ATO’s hit list.
Taxpayers who qualify for the deduction must demonstrate that the tools and/or equipment is bulky and their workplace provides a secure and safe place to store the equipment outside of working hours.
If the equipment is transported to and from work by the worker as a matter of convenience or personal choice, it is considered that the transport costs are private and no deduction is allowable.
ATO provides the following examples in the Taxation Ruling 95/34
Charlie, a bricklayer, uses his car to travel to the work site each day in order to transport his trowels, levels, lines, hammer, mortar boards and other equipment. There is no secure place on site for storage of these items. Because of the bulk of this equipment, Charlie would be entitled to claim a deduction for his car expenses.
Geoffrey, a builder’s labourer, carries only his steel-capped boots to work in his car. Geoffrey’s car expenses are private as his travel from home to work is not attributable to carrying bulky equipment.
Fred, a bricklayer, usually leaves his bulky tools and equipment in a secure area at the work site. His employer requires him to go to a different site the next day, so he takes the tools and equipment home . The cost of Fred’s travel home and to the work site the next day is an allowable deduction as it can be attributed to the transport of bulky equipment.
How confident are you that you will satisfy the ATO requirements?
Posted on March 31, 2020
It’s not uncommon for landlords to be confused about what they can and can’t claim for their rental properties. What often seems to make perfect sense in the real world does not always make sense for the Australian Tax Office (ATO).
In general, deductions can only be claimed if they were incurred in the period that you rented the property or during the period the property was available for rent. This means a tenant needs to be in property or you are actively looking for a tenant. If, for example, you don’t put a tenant into the property so that you can renovate it, then you might not be able to claim the expenses during the renovation period if it was not rented or available for rent during this time (there are some exceptions to this general rule). There needs to be a relationship between the money you make and the deductions you claim. Here are a few common problem areas:
Travelling to inspect your property
You can claim the cost of travelling to inspect your rental property. For example, if you fly interstate to inspect your property, stay overnight then fly home, you can claim the full cost of the trip. If however, the purpose of the travel is a holiday and the inspection is incidental to it, the trip is non-deductible except direct expenses and a reasonable portion of your accommodation.
Interest on bank loans
Only the interest on repayments for investment property loans, and bank charges, are deductible – not the actual loan itself.
Repairs & maintenance
Expenses you incur for repairs and maintenance are deductible if the expenses relate to wear, tear, damage through rental activities.
If the repair improves function or if it replaces an entire structure (e.g. a whole fence as opposed to repairing damaged palings), it’s unlikely to be deductible but will be capital and depreciated over time.
Rental income from overseas
If you are an Australian resident, the ATO looks at your worldwide income. This means that if you own rental property overseas, you have to declare any income earned in your tax return – even if you have lodged a tax return and paid tax on the rental income in the country where the proper.
(Courtesy of KnowledgeShop)