COVID-19 saw many great assistance schemes from the government to benefit small businesses. Temporary full expensing serves the government’s goal of stimulating the economy by encouraging businesses to spend money on equipment and enjoy immediate tax savings. Rather than wait three to 10 years to write off an asset, you can write it off in one go.
Before you rub your hands together in glee in anticipation that you will get a huge whack of cash into your account straight after your purchase, it’s important to know that this scheme does not give you cashback — it reduces your taxable income and therefore your tax payable.
For example, if a business purchases $100,000 of eligible equipment, and assuming it trades through a company with a 25% tax rate, it will save $25,000 in tax for the year. In real terms, the asset will have cost the business $75,000. For businesses turning over less than $50 million, they also get to expense second-hand assets.
Generally, an asset is anything you would have depreciated in previous tax returns.
At the heart of the scheme is the ability to purchase work tools clearly intended for business use. Manufacturing equipment is a good example, as are office furniture, computer equipment or coffee machines, but only if the coffee machine is purchased for an office or cafe; not for your kitchen at home. Take an occupational therapist who spends $150,000 on a piece of machinery for their clinic.
The machine is designed to help people with brain injuries with their fine motor skills. The business owner can claim a 100% tax deduction for that item of equipment, even if the asset is 100% financed.
The scheme doesn’t apply to items such as trading stock, capital works assets like building, CGT, capital gains tax assets like shares or goodwill, or buying another business. The assets must be used and located in Australia.
There are many potential pitfalls with instant asset write-off. Before committing to a big spend, talk to your accountant to determine if your business is eligible and what assets are eligible for full expensing. One of the biggest pitfalls is purchasing a car, as there is a limit on the deduction that can be claimed under the temporary full expensing rules ($60,733 for the 2022 financial year). It is not unlimited, as is the case with other assets.
Any fringe benefits tax consequences also need to be considered. Another potential pitfall would be claiming for equipment shared between business and personal use (for example a laptop), because on these items, you can only claim a benefit on the portion of use that applies to the business, which gets complicated. Having the input of an accountant will ensure there are no unexpected surprises at tax time.
The other benefit of temporary full expensing is that it can create a tax loss in your business, due to the larger than usual tax deduction. Any loss, regardless of how it was created, can be carried back to the 2019, 2020, 2021 or 2022 financial years if there was an income tax liability in one of those years. This is called the Loss Carried Back Tax Offset, which is delivered as a rebate in the tax return of the loss year, and results in a cash refund (so long as you don’t have any outstanding tax debts).
From the government’s perspective, it’s all about getting money into the economy. As a small business owner, if you’re wondering whether you should take advantage of this opportunity, it comes down to your unique circumstances; do you need new machinery or tools? Better to keep 75 cents than spend a dollar on something you don’t need.
Nothing will ever be as simple as it seems, and your first and last place to understand this topic is to talk to your accountant.
Sonia Gibson is the founder of Accounting Heart Chartered Accountants. She has worked as a partner with leading Sydney accountancy firms and has had extensive experience assisting publicly listed companies right through to individuals and small businesses — each with its own set of circumstances.
