This is normally the time of year when many retailers suddenly become an expert in tax deductions. You may be familiar with advertisements like – “Don’t delay. Get your new filing cabinet before 30 June, to claim it as a tax deduction!”
This year I have noticed that many advertisements and various forums are making a lot of noise about the recent changes to the depreciation limit for small businesses (discussed below), which has been temporarily increased to $150,000 in response to Covid-19 Government stimulus measures. This sounds great (and it is to a certain extent) but there are some trip wires for unaware business owners, particularly when it comes to motor vehicles.
WHAT IS DEPRECIATION
Anyone who has bought a brand new car might know all too well what the meaning of depreciation is, as soon as they leave the car yard! In short, it is a decrease of an asset’s value over time. Thankfully, you are allowed a tax deduction for depreciation of an asset that generates taxable income.
There are simplified depreciation methods for a small business. One of the key depreciation concessions is called the instant asset write off, and as mentioned above, the threshold has been temporarily increased to $150,000 up to 30 June 2020. This means that you could potentially get a one hit tax deduction, for the cost of a business asset under this threshold.
The instant asset write-off is a great deduction, but you must remember that it is a timing benefit. In other words, you are bringing forward the deductions to the year when you bought the asset rather than deducting a portion each tax year (usually over the life of the asset). The ultimate tax benefit would depend on your income level in the year of purchase and your income level in future years.
Unfortunately, a car is subject to a reduced threshold known as the car cost limit for depreciation.
In the 2019-20 tax year, the car limit is $57,581. So, if your car dealer starts talking to you about this new $150,000 increased depreciation limit that the Government introduced, you would be wise to question this.
What does this mean?
The MAXIMUM depreciation you might be able to claim on a car is $57,581, even if the car costs much more. Importantly, it is NOT COVERED in the $150,000 increased depreciation limit.
SELLING THE ASSET
When it comes to depreciation, many business owners can see the benefit of claiming the depreciation on purchase, but sometimes they are not aware of the tax issues that may arise when they sell the asset down the track. In general, if you claimed full depreciation on the cost upfront, the proceeds you receive on sale will be included as taxable income in the year of sale and you will pay tax on it.
Some car dealers may have forgotten to include this in their marketing program!
Also, once the novelty begins to wear off from the shiny new purchase, business owners may start to realise they have something similar to a hangover, when they hear their accountant talking about something called “fringe benefits tax on motor vehicles” at tax time!
We will explore this exciting topic in my next post.
KEY TAKE AWAY
The increase in the instant asset write off depreciation limit for small business owners is certainly a welcome initiative. However, from my observations, it appears that many people are sold on the initial benefits but may be blissfully unaware of the broader implications.
You should also be mindful that a tax deduction is just that. There appears to be a misconception out there that you get the equivalent amount back in your tax return. Sadly no! The benefit is at your marginal tax rate. So, if the asset cost $50,000 and your marginal tax rate is 30%, you will get a tax benefit of $15,000.
So, if a purchase is imminent, it may be a good strategy, but if you are only doing it for tax reasons, it may not be the best move. As always, you should speak to your accountant before undertaking any transaction, so you get the full picture of what this means for you and your business.
P.S. We are currently taking on three new ambitious and progressive business clients in the month of June. If your accountant isn’t meeting your expectations on proactive or sound advice, I would like to invite you to reach out to FINNESS ADVISORY for a highly confidential chat to see how we could add value to you and your business. We provide a range of accounting services for companies, trusts, partnerships and SMSFs including tax returns, financial statements and tax advice.
You can email me at [email protected] or call our office on +61 861 615 817.