FOLLOWING the Federal Government’s announcement of a raft of stimulus initiatives, N&B Director John Mathew has summarised how businesses can benefit from an immediate write off of their depreciating assets.
The ruling applies to assets costing $150,000 or less for eligible business, these being a business with an aggregated turnover of less than $500 million effective from 12 March 2020. The interesting part is that the date range for when assets are first used or installed ready for use is 12 March through to 30 June 2020.
Over a career preparing depreciation schedules, John commonly sees tax registers typically capitalising on all work carried out for a year, and then depreciation is calculated from the following year.
The other extreme is that monthly progress payments for multiple separate projects are capitalised and depreciated on a monthly basis although tax law requires a “project to be completed” (ready for use) before a depreciation charge can be taken.
As the eligibility of the $150k claim is based on the first use or ready for use date, it is going to be critical that every “capital project” to refurbish, alter and enhance is properly recorded to ensure documentation is available to substantiate claims.
The Federal Government’s announcement provides an incentive to businesses for the 2019–20 and 2020–21 income years to deduct the cost of depreciating assets at an accelerated rate.
For each new asset, the accelerated depreciation deduction applies in the income year that the asset is first used or installed ready for use for a taxable purpose.
To be eligible to apply the accelerated rate of deduction, the depreciating asset must:
- Be new and not “second hand”;
- Be first held on or after 12 March 2020;
- Be first used or first installed ready for use for a taxable purpose on or after 12 March 2020 until 30 June 2021.
If you are a small business with an aggregated turnover of less than $10 million, and you use the simplified depreciation rules, those assets over the instant asset threshold which are eligible for the accelerated depreciation are added to the general small business pool.
You can deduct an amount equal to 57.5% (rather than 15%) of the business portion of a new depreciating asset in the year it is added. In later years, the asset will be depreciated under the general small business pool rules.
If you are an entity with aggregated turnover less than $500 million in the income year and do not use the simplified depreciation rules, you may be eligible to deduct an amount if the asset is a qualifying asset.
The amount your entity can deduct in the income year the asset is first used or installed ready for use is:
- 50% of the cost (or adjustable value where applicable) of the depreciating asset;
- Plus the amount of the usual depreciation deduction that would otherwise apply but calculated as if the cost or adjustable value of the asset were reduced by 50%.
Effectively, together with the instant asset write-off rules, the accelerated depreciation deduction applies to assets with a cost (or adjustable value if applicable) of:
- $150,000 or more in the 2019–20 income year;
- $1,000 or more in the 2020–21 income year.
ABC Investments Pty Ltd had $1,000,000 work done to their assets and the work included the following:
- New chiller No 1. $250k spend, completed and put in use 10th March 2020;
- New chiller No 2. $250k spend, completed and put in use 20th April 2020;
- New BMS system $140k spend, completed and put in use 1st April 2020;
- New lift $360k completed and put in use 1st April 2020.
Assuming that each lot of work above were individual projects and not part of a larger contract / instruction we have calculated that the claims available for the first part year ending 30 June would be as follows:
- Pre stimulus by non-eligible business; $ 36,843
- By eligible business tax payer post stimulus using simplified rules; $528,250
- By eligible business not using simplified rules. $512,651
The taxflow/cashflow benefit is significantly enhanced, and it will be important for business owners to consider accelerating the capital renewal program.
Now is the time, to review depreciating assets nearing the end of their effective lives. In this environment of low interest rates there may be an opportunity to enhance your assets to meet challenges in the current market, bearing other factors in mind.
Our N&B teams of Tax Surveyors, Quantity Surveyors, Building Surveyors, Engineers and Sustainability consultants can assist you with planning, forecasting and implementing a complete solution for your property assets.
We’re here to ensure you gain the maximum benefits eligible through the immediate depreciation ruling and ongoing capital allowances for your commercial assets.
To learn more please contact our team: