The instant asset write-off scheme was first introduced by the Australian Government through the Australian Tax Office (ATO) on 1 July 2011 to help eligible businesses claim immediate tax relief for the cost of purchasing depreciating assets.
Over the years the limit has increased for eligible businesses. In 2011 it was initially $1,000 per asset increasing to the current limit of $150,000 per asset commencing in 2020.
How does the write-off work?
Instant asset write-off is basically an accelerated depreciation where the cost of an asset is immediately written down to $0 on the balance sheet. This write down reduces taxable income by the amount of the purchase.
While this has benefits up front in saving tax, should the asset be sold at a later date the business will incur a profit on sale of an asset and pay tax on the income generated by the sale.
Temporary tax depreciation incentives
Currently there are 3 temporary tax depreciation incentives available to eligible businesses:
- temporary full expensing
- instant asset write-off
- backing business investment
A business may be eligible for temporary full expensing if they are one of the following:
- a business with an aggregated turnover of less than $5 billion
- a corporate tax entity that meets the alternative income test.
A business meets the alternative income test if both of the following apply:
- Total ordinary income and statutory income (excluding non-assessable non-exempt income) is less than $5 billion for either the
- 2018-19 income year
- 2019-20 income year if that year ends on or before 6 October 2020.
- The total cost of certain depreciating assets held and first used, or first installed ready for use, for a taxable purpose in the 2016-17, 2017-18 and 2018-19 income years (combined) exceeds $100 million, including the cost of
- improvements in the year a depreciating asset was first used – or first installed ready for use – for a taxable purpose
- a depreciating asset that is capital works, which is determined under ordinary cost rules for depreciating assets and not reduced by any portion deductible outside those rules.
Your accountant can provide advice on all criteria for the alternative income test.
The instant asset write-off for a business does not apply for assets they start to hold, and first use (or have installed ready for use) for a taxable purpose, from 7:30pm (AEDT) on 6 October 2020 to 30 June 2023. They must immediately deduct the business portion of the asset’s cost under temporary full expensing.
If temporary full expensing does not apply or you are not eligible for it, you may still claim the depreciation deduction under instant asset write-off if the asset was:
- purchased by 31 December 2020, and
- first used or installed ready for use before 30 June 2021.
For the 2019-20 and 2020-21 income years, eligible businesses may be able to deduct the cost of new depreciating assets at an accelerated rate using the backing business investment – accelerated depreciation rules.
Under Backing business investment eligible businesses for the 2019-20 and 2020-21 income years may be able to deduct the cost of new depreciating assets at an accelerated rate using the Backing business investment rules.
The accelerated depreciation deduction applies for each new asset in the income year that the asset is first used or installed ready for use for a taxable purpose. The usual depreciating asset arrangements apply in the subsequent income years that the asset is held.
Write off of assets for taxation benefits is complex and before purchasing any asset your accountant or tax specialist needs to be contacted to confirm which option is best suited to the business.
Who is eligible for write-offs?
The asset write-offs are available for all businesses in Australia including:
- sole traders
- companies, and
To claim the write-off, a business must have purchased and used the vehicle for business purposes within the same financial year as their claim. For instance, if you buy a new vehicle on 20 June but don’t use it until July, you will have to claim it in the following tax year.
The scheme allows for a business to claim on a range of depreciating assets, however we will specifically look at motor vehicles:
- motor vehicles (sedans and SUVs)
- utes or tradesman vehicles
- light commercial vehicles
A car limit applies to the cost of passenger vehicles (except a motorcycle or similar vehicle) designed to carry a load less than one tonne and fewer than 9 passengers.
The car limit does not apply to vehicles modified for use by people with a disability and a business cannot claim the excess cost over the car limit under any other depreciation rules.
The write-off is limited to the business portion of the car limit for the relevant income tax year. For example, the car limit was $59,136 for the 2020–21 income tax year. If you use your vehicle for 75% business use, the total you can claim under the write-off is 75% of $59,136, which equals $44,352.
The write-off must be essential for the business
If you purchase an asset used for both business and personal reasons, you can only deduct the percentage of the value used for business purposes.
It does not matter if the business pays for the vehicle with cash or obtains finance. If borrowing, you should seek advice from your accountant regarding the most appropriate finance product.
Are second hand vehicles eligible?
Both new and second-hand vehicles qualify for the write-off scheme as long as the items meet the criteria set down by the ATO. Therefore, you can claim tax deductions for either used or new vehicles.
You should always consult your accountant before purchasing assets and have them check with the ATO whether the vehicle meets the eligibility criteria for the asset write-off.
What type of vehicle should you consider purchasing?
Purchasing vehicles purely for the purpose of reducing your taxable income is not a good idea. If you decide to use one of the asset write-off schemes, you should only purchase necessary items for your business. For example, if you need a vehicle to deliver goods or expand your business operations, it makes sense to use the asset write-off plan.
When making a decision to purchase a business vehicle you will need to ensure that the vehicle is ‘fit for purpose’.
Examples of vehicles not being fit for purpose could include:
- buying a prestige car for a director who logs minimal business kilometres, or
- purchasing a sedan (instead of a ute or other appropriate vehicle) for a tradesperson who needs room to transport tools of trade and materials to worksites.
Disclaimer: This article provides an overview of the requirements for ‘instant asset write-off’ and should not be seen as providing taxation advice. All asset write offs have a number of complex issues to be considered and any business considering claiming the write-off should consult their accountant before making any purchase.