Don’t be a tool when it comes to instant kick
Tradies and other small business owners have been warned to not rush to blow $20,000 just to get a quick tax deduction for the 2017-18 financial year.
While it can be appealing to think they we’re saving on tax bills, the tax refund from the acclaimed instant asset write-off is a little over one-quarter of what the business operator has to fork out to get the deduction.
This is because the Federal coalition has been successful in not only continuing the generous write-off scheme but also in getting support for cutting the small company tax rate to 27.5 per cent.
Accountant Michelle Maynard said many business owners were motivated by tax deductions because they were under the wrong impression they were refunded a dollar for each dollar spent.
The Carbon Accountants partner said a person operating their business often had income reduced by deductions to the extent that their tax bills were based on the concessional company rate of 27.5¢ in the dollar.
“An asset that costs $20,000 will only result in a tax refund of $5500,” she said.
And she warned the incentive labelled the instant asset write-off was anything but instant in providing its modest return on the money spent.
The cash benefit of any write-off is not returned until the tax return is lodged and any refundable amounts were sent to the business operator.
Ms Maynard warned that business operators needed to keep the delay in mind when considering equipment purchases, their financial situation and any tax refunds that might ease the burden.
“This can sometimes be up to 11 months after the financial year has ended,” she said.
In the Federal Budget three weeks ago, Treasurer Scott Morrison further extended the scheme until the end of the 2018-19 financial year after winning widespread support from the small business lobby for the relaxed tax rule.
The $20,000 write-off has been a Principal
Plus: Interest Total repayment Less: Tax refund After-tax cost flagship small business policy of the Government and is seen as an excellent option for small business operators needing to update or replace necessary equipment.
It bypasses depreciation schedules and tax rules that generally require business assets to be depreciated at a rate in line with their actual lifespan, meaning deductions for big equipment purchases can take years to flow through to a business’ bank accounts..
Such delayed write-offs might be manageable in big corporations with sophisticated finance, but big equipment purchases can place stress on the cashflow of smaller businesses.
A quicker write-off can reduce some of that stress.
However, Ms Maynard said most small businesses funded asset purchases with finance that would require repayments and incur interest bills over several years.
She said these repayment commitments could continue long after the relatively modest refund under the instant asset write-off had been received.
“While interest on finance is also deductible for small businesses, the tax deduction is still only a proportion of the overall cost,” she said.
The entire purchase price of the asset must be less than the $20,000 cap to qualify for the instant asset write-off scheme, the tax office says in guidance notes.
If a tradie buys a $40,000 ute that is used 40 per cent of the time for her business, the sum of $16,000 is added to the depreciation pool of her business and written off over several years.
Assets that cost less than $20,000 can be written off in the year of purchase to the extent they are used for business purposes, making most tool and office equipment upgrades subject to the scheme.
A $6800 printer used 80 per cent for business would attract a $5440 instant write-off, according to the tax office.
AN ASSET THAT COSTS $20,000 WILL ONLY RESULT IN A TAX REFUND OF $5500.
$265 $150 $415 $41 $374 Year 2
$3341 $1641 $4982 $5951 +$969 Year 3
$3655 $1327 $4982 $365 $4617 Year 4
$3998 $984 $4982 $271 $4711 Year 5
$4373 $609 $4982 $168 $4814 Year 6
$4368 $199 $4567 $55 $4512 Total
$20,000 $4910 $24,910 $6850 $18,060