As the end of the calendar year approaches, there’s another event that SMEs will have to watch out for besides being caught on Santa’s naughty list; this being the end of the current $6500 outright deduction for low value assets, otherwise known as the so-called “instant” asset write-off.
The government is proposing to scrap the deduction through a series of amendments which includes changes to the mining tax, all before 1 January 2014. This would mean that the current threshold would be reduced to just $1000.
The deduction is currently available in the income year in which a business starts to use the asset, or installs it ready for us, for a taxable purpose. Overall these proposed changes mean that SMEs only have a few more weeks to take advantage of the existing $6500 deduction threshold.
Whilst this may stir a bunch of anxious small business owners into a buying frenzy before the New Year, the catch is that the changes might not be law by 1 January 2014. The bill’s amendments might not be passed until after that date, despite the Prime Minister’s reported threats to get these bills passed.
Despite this “catch”, business owners that are already contemplating purchasing assets that would be subject to the changes must ensure that the purchase is made and the asset is installed ready for use before 1 January 2014, to secure their instant asset write off of up to $6500.
It should be remembered that the threshold applies on a per asset basis, so several assets each costing up to $6500 would qualify for the write-off if installed ready for use before 1 January 2014.
Case in point
A small business purchases equipment costing $5000 on 12December 2013. The equipment is installed and ready for use by 20 December 2013, but it is not actually used until 21 February 2014. Although the business didn’t start to use the equipment until after 1 January 2014, the $6500 instant asset write off threshold continues to apply as the equipment was installed ready for use before 1 January 2014. The business would therefore be able to claim a deduction for the full cost of the equipment because the taxable purpose proportion of its adjustable value is under $6500 (being $5000 x 100% business estimate use).
Under the current legislation, SMEs can claim a special deduction with regards to purchasing a motor vehicle used in the business in the income year in which the vehicle was first used or installed ready for use. That deduction is equal to the taxable purpose proportion of the first $5000 value of the motor vehicle plus 15% of any additional value. The remaining value of the motor vehicle is then allocated to the small business entity’s general small business pool and depreciated as part of that pool at an ongoing rate of 30% in later income years.
Currently, these rules apply to vehicles that cost more than $6500 (as motor vehicles costing less would be subject to the general instant asset write-off rule). If repealed from 1 January 2014, the general capital allowance provisions would apply to depreciating assets that are motor vehicles in the same way they do to all other deprecating assets.
Most SMEs are already aware of these expected changes and they need to take action now, but the looming uncertainty of the actual decision date of these amendments is proving to be quite problematic for most small business owners. Depending on the asset, it may already be too late; but if an asset can be purchased and installed ready for use before 1 January 2014 (and all other relevant rules are satisfied) then it should be ensured that this occurs in order to protect the $6500 instant write off.
As mentioned, the uncertainty surrounding this legislation can be a big enough headache, coupled with the already demanding festive season and slow-down most companies face at this time of year. To ensure you don’t miss out, it’s best to speak to a qualified professional about any concerns you may have; contact one of our expert accountants for more information prior to 1 January 2014 to get a proper grasp on the situation.