By Tenika Kirkwood
One of the most anticipated events this year has been and gone – did you miss it?
We are not talking about the My Kitchen Rules grand final but the handing down of the 2015 budget by Joe Hockey, the Federal Treasurer. There has been a lot of talk of the ‘winners’ and ‘losers’ of the budget, but rest assured we are here to help you understand what it all means for you and your business!
The budget included a number of measures specifically aiming to assist small businesses, generally with a turnover of less than $2 million a year. Today we are going to focus on the potential opportunity for small business to receive immediate tax deductions for purchases up to $20,000.
Previously, businesses that made capital purchases over the value of $1,000 were required to depreciate the purchase cost over the life of the asset. For assets acquired after 7.30pm on the 12th of May 2015 it has been proposed that small businesses can claim an immediate tax deduction for purchases up to the value of $20,000. This however is a limited time offer and will expire on the 30th June 2017.
This is all good and well but what does it mean for you? For example, if your business has currently made a net profit of $100,000 for the financial year, and you purchased a new piece of equipment for $19,999, then you would only pay tax on $80,001, rather than paying tax on $100,000. Effectively the purchase price of the asset, reduces the taxable income for the financial year in which it is purchased. It does not mean that you receive the entire purchase price back as a tax refund!
So there is no confusion, it is important to revisit what a ‘depreciating asset’ is. A depreciating asset is an asset used in a business that has a limited effective life and is expected to decrease in value over the period it is used. Examples of depreciating assets include motor vehicles, office equipment and machinery.
A question posed by many small business owners since the budget is: ‘where will the money come from to purchase these assets?’ It is important to remember that this was a government initiative and there are many tips and tricks that you should be aware of before making any hasty purchases.
If you had intentions to purchase the asset anyway and have the available funds, this will certainly be advantageous to you and your business if you have made a net profit this financial year, through reducing your tax liability. If it is time to upgrade some of your equipment, this may also be the right time to do so. Although interest rates are at an all-time low, it is not necessarily justifiable to go into debt to obtain these deductions.
Some of the traps we don’t want you falling into is having you rush out and spend, spend, spend – we know how much everyone loves to shop! Checking with your accountant first is more often than not, a step in the right direction. In addition, if your business is not making a profit, a tax deduction is going to be of no assistance to you. It may also be of greater advantage to purchase the asset in the following year if your business is expected to make a larger profit, whereby the tax deduction available will be more useful to reducing your tax liability.
Another potential pitfall is that you will also not be allowed to split an invoice and claim $20,000 of the purchase price as a deduction. The guidelines clearly state that the asset purchased must be below $20,000. The good news is though, there is no cap on the number of assets purchased. So if it is the right move to make, you can purchase all that you need.
Like any purchase it is extremely important to make certain that all receipts and invoices are kept for record-keeping purposes.
Remember, if you are unsure if this is a positive move for you and your business, we encourage you to call us on (07) 4638 1155 to speak with your accountant first. We can then help you make an informed decision– providing your business with the best result possible.
Please note: At the time of writing, the laws had not yet been enacted and are waiting to be passed through the senate.