In an effort to help small businesses, the Australian government has passed a tax incentive known as the $20,000 instant asset write-off. This measure allows businesses to immediately deduct the cost of an asset in the year it was purchased, instead of gradually depreciating it over time. The initiative was originally introduced to support small businesses and has undergone several changes and expansions since its inception. Want to better understand what the write-off is and who is eligible for it? Read on.

Eligibility: Who Can Claim an Instant Asset Write-Off?

For your small business to qualify for the $20,000 instant asset write-off, it needs to meet the following conditions:

• It’s been actively trading (i.e. carrying on a business) during the 2023-24 financial year.

• Its annual turnover is less than $10 million dollars (i.e. a small business entity). This can be based on 2023-24 or previous year's figures.

• The business must choose to apply simplified depreciation rules for the 2024 income year. (Consult your financial professional on how to do this.)

• The cost of the asset you plan on writing off is less than $20,000.

• The asset must have been first used or installed ready for use for a taxable purpose between July 1, 2023 and June 30, 2024.

It’s important to note that if a small business entity opts out of using simplified depreciation rules for the 2024 income year, it loses eligibility for the instant asset write-off even if it meets all other eligibility criteria.

Also note: if the depreciating asset is sold in a subsequent income year (after June 30, 2024), all proceeds received will need to be treated as assessable income in that year, as the written down value of the depreciating asset will be nil/zero.

What is the Benefit of a Write-Off?

The main advantage of the instant asset write-off is its immediate tax relief, which can help businesses manage cash flow by reducing their taxable income in the year the asset is purchased.

This incentive has been particularly beneficial for businesses looking to invest in equipment, vehicles or other assets to expand operations or improve productivity.

What Assets Are Excluded From Instant Asset Write-Off?

There are a small number of assets that are excluded from the initiative. These include:

• Leased Assets: Assets that are leased, or expected to be leased out, for more than 50% of the time on a depreciating asset lease.

• Low Value Assets: Assets allocated to a low-value assets (pool) before using the simplified depreciation rules.

• Plants: Horticultural plants including grapevines.

• Software: Software allocated to a software development pool (but not other software).

• R&D: assets used in your research and development (R&D) activities.

• Capital Works: including building and structural improvements.

• Some Primary Production Assets: for which you can only use the general depreciation provisions or simplified depreciation rules.

How Does the Instant Asset Write-Off Work?

The $20,000 threshold applies per asset, allowing businesses to potentially deduct the full cost of multiple assets throughout 2024, so long as each asset's cost is under $20,000.

If, for example, you buy a new car for $25,000 ex GST and get a trade-in of $6,000 for an old vehicle, you will not be entitled to claim the full cost of the deduction. An asset’s entitlement is measured solely against the cost of the acquired asset itself.

Assets can only be immediately written off if they fall under depreciation rules, excluding building improvements that are covered by capital works regulations. Assets costing $20,000 or more can be grouped in the small business general pool. They are depreciated at 15% in the first year and 30% in subsequent years.

Finally, the lock-out rules, preventing small businesses from re-entering the simplified depreciation regime for five years if they opt out, was not being enforced until June 30, 2024.

What is Depreciation?

Assets such as machinery, buildings, vehicles and equipment are essential to business operations but lose value over time. Depreciation refers to the process of expensing the cost of an asset over its lifetime to reflect the gradual wear and tear, obsolescence or loss of value that the asset experiences during its operational use.

The Australian Taxation Office (ATO) sets depreciation guidelines for how assets should be depreciated for tax purposes. Tax implications can vary on individual circumstances, so it's advisable to consult with a tax professional or accountant to maximise the benefits and ensure compliance with tax laws.

What Does It Mean for an Asset to be Written Off?

Fixed Assets are typically depreciated using rates set by the Australian Taxation Office. For instance, motor vehicles are depreciated over an 8-year useful life at a rate of 25 percent, while computers have a 3-year useful life.

In a move to support small business owners, the government allows an alternative to these standard depreciation rates. Instead of spreading depreciation over several years, businesses can choose to immediately write off the entire cost of an asset in the year it is acquired. This provides an incentive for investment by allowing businesses to deduct the full amount of the asset's cost upfront.

If you are after more tax tips, read our article, 8 Surprising Things You Can Claim as a Tax Deduction for Your Small Business.

Lastly, if you’re a small business owner looking for funding to purchase an asset, smooth out cash flow or grow your business, you can apply for a business loan with Bizcap. It takes 5 minutes to apply and same-day funding is available.

Please note: This article is for general information purposes only and is not meant to be tax advice. The information in this article was contributed by Lowe Lippmann Chartered Accountants. If you need assistance with your taxes, seek help from a finance professional. For more information about the instant asset write-off, visit the Australian Taxation Office website.