Out of all the measures in this year’s budget, the increase in immediate small business deductions from $1,000 to $20,000 must be one of the most talked about. This measure sounds very appealing; if you’re a small business (with a turnover of less than $2 million) you can now receive a tax deduction on the full value of assets with a purchase price less than $20,000, which you begin to use or install ready for use between 7:30pm on May 12th 2015 (Budget Night) and 12 midnight on June 30th 2017.
For example:
If you’re a small business owner, operating as a sole trader, with between 80,000 and 180,000 of taxable income and you buy a work vehicle for $19,000; you can claim the full $19,000 at 39c on the dollar and save $7,410 on your Tax.
This sounds like a win-win situation; buy things your business needs and save on your tax. If managed correctly, and used for the correct purchases, it is. However, if used incorrectly, it could leave you liable to a larger tax burden down the track. How you ask? Well, let’s go back to the above example:
Let’s say our small business owner is a plumber, he works out of his ute and has high quality tools he purchased years ago. All up he has $5000 of assets still to be depreciated going into his next tax return. Because his ute is getting a bit long in the tooth he takes this opportunity to purchase a 2nd hand ute for $19000 and receives a saving of $7995 on his next tax return (after his other $5000 of assets are depreciated by 30%). Two years go by, our plumber doesn’t buy any more large assets and those assets he does buy are immediately depreciated for tax savings on each of his next two tax returns.
After owning the ute for two and a half years; our plumber decided to sell it for $10,000 and lease a vehicle instead. When his next tax return comes around he has purchased $3000 in other new assets, but; the difference between his depreciable assets ($3,000) and the proceeds from the sale of his fully depreciated asset ($10,000) will result in $7,000 profit being added to his bottom line from the sale of his old ute. At a 39c tax rate this will result in our plumber being liable for an extra $2730 in tax that year.
At the end of the day; while large immediate deductions are good, if you’re not going to hang onto the assets for an equivalently large length of time, you still end up paying some or all of the Tax. For large, quick turnaround purchases, it may be better to forgo the immediate deduction and depreciate them over time. Tax implications may vary depending on how you are structured. e.g. sole trader, partnership, trust or company. However the underlying principals remain the same. The only way to know is to speak to a professional. My colleagues and I certainly have you covered there.