One of the important things to remember is that the tax break applies to individual, rather than grouped items. So a business owner can purchase, say, three items before 30 June that individually cost $14,000, $12,000 and $10,000 and receive deduction in this financial year for all three items. But if the item is valued over $20,000, then it doesn’t qualify for the tax deduction.
Amanda Ward, principal of Award Accounting, explains how the new rules work
As an example, says Ward, a small business can claim the full cost of a motor vehicle purchased after budget night and before 31 June 2017 that costs $20,000 or less, where the vehicle is used only for business purposes.
“You can also claim the cost of a fit-out, where each invoice for individual items is $20,000 or less,” she explains. So a total fit-out could cost $60,000, comprising $20,000 for new desks on one invoice, $20,000 for new product display stands on a second invoice and $20,000 for new boardroom furniture on a third invoice. Each invoice could be separately and written off as a tax deduction.
She says aside from the increase in the deduction limit from $1,000 to $20,000, the rules for deductible assets held in a pool have also changed. “If a general small business pool has a balance that is less than $20,000 over this period this can also be deducted,” says Ward.
It is, however, important to be aware of the fine print of the new system. As Ward notes, “the new tax rules are available only to those small businesses with an aggregate annual turnover of less than $2 million.”
Also, the asset purchase threshold does not include GST. So with a car that costs $22,000 including GST, the $2,000 GST component would be claimed in the business’s BAS and then a tax deduction of $20,000 would be claimed for the vehicle itself.
Understanding the rules
It’s also important to realise that the tax break isn’t a rebate. So businesses do not receive a cheque from the tax office after making a business purchase. Rather, any business-related expenses serve to reduce the entity’s taxable income, which means the business pays less tax.
This is important to grasp because the risk is that some businesses will buy items they don’t really need, just to take advantage of the tax deductions. This is a false economy: don’t buy anything unless it will help improve the way the business operates.
Its also important to note that these deductions will only be applied once businesses file their tax returns.
It’s worth seeking the advice of a professional such as a trusted accountant before incurring any commercial expense as a sanity check to ensure it makes good business sense.
Although these concessions have been passed in Parliament, they have not been enacted in legislation yet.
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Amanda Ward is a principal of Award Accounting. The views above are those of Amanda and Award Accounting and not Telstra. Telstra does not endorse the content or material.