Changes to instant asset write-off rules

By Ben Grillo and Sharelle Staff

As a part of the Government’s recent economic stimulus package the small business instant asset write-off (IAWO) threshold has been increased from $30,000 to $150,000.

The changes, which now extend to businesses with an aggregated turnover of less than $500 million (increased from $50 million), have been extended to apply from 12 March 2020 until 30 June 2021. This concession effectively provides cash flow benefits to businesses where an immediate deduction is available for the purchase price of otherwise depreciable business assets.

Section 328.180 of the Income Tax Assessment Act 1997 (Cth) provides that small business entities can immediately deduct the cost of eligible assets so long as they cost less than the applicable threshold and are used for a tax deductible purpose. This threshold is set out in section 328.180 of the Income Tax (Transitional Provisions) Act 1997 (Cth) (the Provisions Act) and changes depending on when the asset was acquired and installed ready for business use.

Prior to IAWO amendments, the threshold, as stated in section 328.180(4) of the Provisions Act, was $30,000 which meant that only assets costing less than that amount could be instantly written off. By way of example, assume that Mike purchased a $50,000 excavator for his construction company in January 2020. As the cost of the excavator was above the $30,000 threshold, the company was ineligible for the instant asset write off, requiring it instead to deduct the $50,000 against its business profits over a number of years (normal depreciation).

The recent changes saw section 328.180 of the Provisions Act amended to include section 4A which increased the IAWO threshold to $150,000. Despite only applying to eligible assets acquired after 12 May 2015 and first used or installed ready for use between 12 March 2020 and 31 December 2020, there is no limit on the number of assets a business can claim. This means that if Mike has first used or installed another asset ready for use between 12 March 2020 and 31 December 2020, that asset would be eligible to an instant asset write off in accordance with section 328.180, bringing forward the deductions usually subject to the normal depreciation provisions.

While new and second-hand tools and equipment, office furniture and computers are examples of other assets which can be instantly written off, a small number of assets, including horticultural plants and in-house software, are specifically excluded by the ATO. Vehicles are also subject to their own ‘car limit’ which applies to the cost of passenger vehicles, and business owners should familiarise themselves with these specific provisions found on the ATO website.

Despite these limits, the IAWO amendments have been welcomed by business owners seeking to trade their way out of COVID-19, with many including the Tax Institute of Australia calling for the changes to become a permanent feature of the tax system beyond 31 December 2020.