How To Benefit From Buying Assets Using Small Business Loan And Save On Tax
Do You Want To Buy Assets Quickly To Win At Tax Time But Need Some Funding?
The period leading up to the end of the financial year is an excellent opportunity to consider if you might be eligible for the Instant Asset Write-Off. The Instant Asset Write-Off is one of the most widely discussed tax benefits for businesses since it allows them to acquire assets and claim an instant tax deduction.
However, it doesn't imply you should start spending before the end of the financial year. This article explains the Instant Asset Write-Off, its use, and updates on other technicalities like Temporary Full Expensing.
What Exactly Is An Instant Asset Write-Off?
This provision allows eligible companies to claim an immediate tax deduction for the business component of an asset's cost when the asset purchased is first used or installed and ready for use.
This accelerated depreciation allows a company to lower its taxable income by deducting eligible purchases. It results in a cash flow benefit relative to the tax rate payable by the organisation.
The best part is that it can be utilised for many assets if the cost of each purchase is less than the applicable threshold for new and used assets purchased. To enable small businesses to claim a deduction, companies need to apply the simplified depreciation rules, and it cannot get utilised for assets excluded from those rules.
How Does Instant Asset Write-Off Work?
This tax break is not a cash handout from the government. It's a tax break that lowers your company's taxable profit. Furthermore, ensure you pro-rate the deduction for any personal usage. The asset must get used for business purposes to claim the full tax deduction.
Here's an example of how you can use the instant asset write-off to lower your taxable income and free up funds to further invest in your business. A small business has a $1,200,000 turnover and a net taxable income of $240,000. The company pays the Australian company tax rate of 25%.
Total Tax Payable
The total amount of tax payable is $60,000, calculated as follows:
Company Tax Rate 0.25 x Net Taxable Income $240,000 = Tax Payable $60,000
The organisation purchases $75,000 of eligible assets under the instant asset write-off scheme during the financial year.
The total asset value is subtracted from the net taxable income to arrive at a reduced taxable income of $165,000, calculated as follows:
Net Taxable Income $240,000 minus Purchases of Eligible Assets $75,000 = Reduced Taxable Income $165,000
Reduction In Total Tax Payable
The total tax payable is reduced by $41,250 (0.25 x $165,000) due to the instant asset write-off scheme, calculated as follows:
Company Tax Rate 0.25 x Reduced Taxable Income $165,000 = Reduced Total Tax Payable $41,250
The tax savings by claiming the scheme's deductions would be $18,750, calculated as follows:
Total Tax Payable $60,000 minus Reduced Total Tax Payable $41,250 = Tax Savings $18,750
Actual Assets Cost After-Tax Savings
With the tax savings, the actual cost to the organisation for purchasing the assets is $56,250, calculated as follows:
Purchases of Eligible Assets $75,000 minus Tax Savings $18,750 = Actual Assets Cost After-Tax Savings $56,250
What Is The Purchase Threshold For The Instant Asset Write-Off?
Businesses can claim an immediate deduction for the entire cost of an asset up to $150,000 under the instant asset write-off scheme. The $150,000 threshold gets applied per asset.
If each purchase is less than the threshold, there is no limit to the number of assets that can get claimed as a tax deduction under the instant asset write-off scheme.
Companies having an aggregated turnover of $50 million to $500 million may be entitled to deduct the total cost of qualified second-hand assets that cost less than $150,000. The business assets must be in use or installed by 30 June 2023.
It allows eligible organisations to claim a tax deduction for the cost of an asset used or installed and ready for use. Check your company's eligibility and apply the appropriate threshold based on when the asset got purchased, used, installed, and ready for use.
How Do You Take Advantage Of The Instant Asset Write-Off?
If you own a small business, you must use the simplified depreciation rules to claim the Instant Asset Write-Off. The measure can't get applied to assets exempt from such rules. Sole proprietors are also eligible.
Regardless of the size and complexity of your business, it is advisable to consult a skilled tax practitioner to maximise your tax return and stay in compliance with the law.
What Is Temporary Full Expensing?
The Instant Asset Write-Off expanded to include a provision known as Temporary Full Expensing. You can claim your deduction when filing your tax returns for 2020-21, 2021-22 and 2022-23.
Refer to the Australian Taxation Office (ATO) website for more information on Temporary Full Expensing. Millions of Australian firms are estimated to be eligible for the scheme intended to promote business expenditure.
Temporary Full Expensing allows for an immediate deduction as follows:
- Purchases of new, eligible depreciating assets are applicable for businesses with an aggregated turnover of less than $5 billion.
- Eligible used assets are applicable for companies with an aggregated turnover of less than $50 million.
- At the end of the income year, the balance of a small business pool is applicable for businesses with an aggregated turnover of less than $10 million.
- Furthermore, no balancing adjustment can happen to the asset in the income year. For example, it does not get sold in the year the full expensing gets applied.
The initiative is to help businesses. It helps to stimulate investment by allowing eligible organisations to claim an immediate tax deduction. The tax deduction is available for the business portion of the asset cost in the year it is used or installed for tax purposes.
What Is The Catch Of Instant Asset Write-Off?
Companies need to follow a few criteria to ensure they can claim any asset's cost. The asset must be purchased and installed within the time frame specified by the government from 6 October 2020 to 30 June 2023.
The asset must be ready for use. You cannot have it hanging around and expect to instal it in a couple of years. You must be in business to take advantage of the Instant Asset Write-Off. Having an ABN is insufficient. Hence, it's another reason organisations must keep track of and document their expenses.
Which Assets Should You Think About Buying?
Before making any significant acquisition, consider how the asset will affect your business. Your decision to take advantage of the scheme should get based on your current needs and your company's expected expansion.
For example, as part of your long-term company plan, you may intend to extend your production capacities with new equipment. In that instance, the instant asset write-off scheme offers a chance to lower the cost of expansion.
You should buy assets that will assist you in reaching your business goals rather than only gain a tax break. The rapid asset write-off scheme offers an incentive to invest in your firm and decrease your taxable income. However, it is essential to consider the impact on your short-term finances and cash flow.
Examples Of Tax-Deductible Items
Some of the items you can consider purchasing are as follows:
- Cash registers and other point-of-sale (POS) devices
- Motor vehicles such as cars, vans, and utes
- Fixtures and fittings
- Plant, machinery and equipment
- Desktop computers and laptop computers
- Security systems
How Can You Take Advantage of Tax Savings By Getting A Business Loan?
We understand that purchasing business equipment can be costly, so every business owner must understand when and where they can deduct their company's purchases.
According to the ATO website, the Instant Asset Write-Off allows small businesses to claim an asset write-off. It applies to assets that cost less than the instant asset write-off threshold and are purchased and used in the year of claiming the write-off.
The business loan can assist small businesses needing working capital to meet an immediate short-term demand or manage ongoing business requirements.
How Can You Take Advantage Of The Instant Asset Write-Off?
To be eligible for the instant asset write-off, your company must meet the following requirements:
- As defined by the ATO, you must be a small business. Visit ATO's Small Business Entity Concessions website to learn more about how small businesses are determined to assess your eligibility.
- The assets must:
- Cost is lower than the instant asset write-off threshold.
- Purchased and used within the financial year, you are claiming the write-off.
Refer to ATO's Instant Asset Write-Off website for more information.
How To Apply For A Tax Deduction?
There is no need to apply. The write-off gets treated as a tax deduction when you file your tax return for the relevant financial year. Visit ATO's Instant Asset Write-Off website to learn more.
Under the simplified depreciation rules, assets that cost less than the instant asset write-off threshold get written off in the financial year they are first used or installed.
This criterion applies to all assets, whether a brand new asset gets purchased or a used asset purchase. Consult a qualified professional for guidance on your eligibility to claim a tax deduction.
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This article does not constitute legal, business, financial, or accounting advice. All readers must seek the assistance of qualified professionals as required.
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