Instant asset write-off: Who qualifies and how to claim your tax deduction

NOTE: Instant asset write off is not yet legislated. It's before Parliament. So at this stage, we cannot say it's a definite but we think it's likely to be passed and back dated so please proceed with caution: https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/small-business-support-20000-dollar-instant-asset-write-off

The Instant Asset Write-Off (IAWO) is a valuable tool for small businesses in Australia, allowing for an immediate tax deduction on the cost of eligible assets. Let's explore this tax break in detail, including eligibility, thresholds, exclusions, and how to claim your deductions.

What is the instant asset write-off?

Let's take this as an example – you've just started a small bakery. You need a new oven to bake your delicious pastries. The oven costs $8,000. Now, you have two options:

• Depreciation: You could gradually deduct a portion of the oven's cost from your taxable income over several years.
• Instant asset write-off (IAWO): If you're eligible, you can deduct a total of $8,000 from your taxable income in the same year you bought and started using the oven.

That's the magic of the IAWO! It's like getting an immediate discount on your tax bill, leaving you with more money to reinvest in your business.

The IAWO lets eligible businesses claim a full deduction for the business portion of an asset's cost in the year it's first used or installed ready for use. This contrasts with traditional depreciation, where the asset's price is deducted over several years.

How does it work?

• Immediate deduction: Write off the entire cost in the year you start using the asset.
• Cash flow boost: This deduction lowers your taxable income, meaning less tax paid and more money in your pocket.

Who is eligible?

Eligibility hinges on several factors:

• Are you a small business? To qualify, your annual turnover (total business income) needs to be under $10 million.
• When did you buy and start using the asset? The IAWO has different thresholds depending on these dates.
• How much did the asset cost? The cost needs to be below the relevant threshold to qualify for the full write-off.

Instant asset write-off thresholds

The threshold is the maximum amount you can deduct immediately. The thresholds have changed over time, so it's crucial to confirm the correct amount for your situation.

For small businesses (aggregated turnover < $10 million) in the 2024 income year:

• Threshold: $20,000
• Eligibility conditions
  • The business must operate under general principles.
  • The asset must be first used or installed ready for use between 1 July 2023 and 30 June 2024.
  • The business must choose to apply the simplified depreciation rules for the 2024 income year.

Important note: If your business doesn't opt for the simplified depreciation rules, you won't have access to the instant asset write-off, even if you meet the other conditions.

The $20,000 threshold also applies when determining if the full balance of your small business pool can be written off in the 2024 income year.

Learn more about instant asset write-off threshold here.

Note: Businesses with turnover of $500 million or more are not eligible.

What assets are eligible?

The good news is that the instant asset write-Off covers a wide range of assets you'd typically use in your business.

• New and used assets: Whether you're buying brand-new equipment or opting for pre-loved items to save some money, both are generally eligible for the IAWO. For example, a newly purchased delivery van or a second-hand coffee machine for your café can both qualify. However, some restrictions may apply to used assets for businesses with higher turnovers, so it's always best to double-check with the ATO.
• Multiple assets: You're not limited to just one asset. You can claim multiple assets as long as each individual item's cost is under the relevant threshold. This means you could purchase several laptops for your team, a new printer, and even a set of tools, and write off the entire cost of each item in the same year, as long as they individually meet the threshold criteria.

Examples of eligible assets:

• Tools and equipment: Power tools, hand tools, machinery, kitchen equipment, etc.
• Vehicles: Cars, vans, utes (subject to the car limit), trucks, etc.
• Computers and technology: Laptops, desktops, tablets, printers, software, etc.
• Office furniture: Desks, chairs, filing cabinets, etc.
• Other business assets: Shop fittings, signage, air conditioners, etc.

Remember, the key is that the asset needs to be used in your business to generate income.

What assets are not eligible?

Understanding what assets don't qualify for the IAWO is just as important as knowing what does. Here's the rundown:

• Assets over the threshold: If the cost of an asset exceeds the relevant threshold for your business, you won't be able to claim the full deduction immediately. Instead, you'll need to depreciate the asset over time, gradually deducting a portion of its cost each year.
• Assets leased out over 50% of the time: If you primarily lease out an asset to others, it doesn't qualify for the IAWO. The logic behind this is that the write-off is intended to benefit businesses that are actively using the assets to generate income.
• Horticultural plants: Plants used in horticulture (like fruit trees or grapevines) are not eligible for the IAWO. These assets have their own specific depreciation rules.
• Software development pools: Software that is specifically allocated to a software development pool has different depreciation rules and can't be instantly written off.
• Assets used for research and development (R&D): Assets primarily used for R&D activities are also excluded, as these often fall under different tax incentive programs.
• Capital works: Buildings, structural improvements, and other fixed assets generally don't qualify for the IAWO. These assets are usually depreciated over a much longer period.
• Assets not used for business: Only assets that are used in your business to generate income are eligible. For example, a car used solely for personal trips wouldn't qualify.

Special rules and limits

Car Limit

Imagine you're a tradie and want to write off a new ute. Here's the catch: if the vehicle is designed to carry less than one tonne (think of it as the maximum weight it can safely haul) and fewer than nine passengers, there's a limit on how much you can claim. This limit changes yearly, so check the latest amount from the ATO. For example, in 2023-24, the car limit is $68,108. If your ute costs more, you can only claim up to the car limit; the rest will need to be depreciated over time.

Pro Tip: Claiming car expenses can be tricky. Make sure you're maximising your deductions by understanding the specific rules and examples in our guide on car expense claims.

GST

This part can be a bit tricky. If your business is registered for GST, the thresholds we discussed earlier don't include the GST you paid on the asset. If you're not registered for GST, the thresholds include GST. This is because registered businesses can generally claim back the GST they pay on purchases, while unregistered businesses cannot.

How to claim your deduction

It's easy! Just include the deduction in your annual tax return. Keep good records of your asset purchases and how you use them for your business.

1. Check eligibility
   Double-check that your business's turnover is under the limit, you bought the asset within the correct time frame, and the asset itself is eligible (remember, no buildings or things you mainly lease out).
2. Calculate your deduction
   Let's say you bought a laptop for $2,000 but use it for personal stuff 20% of the time. In this case, you can only claim a deduction for the business use portion, which is 80% or $1,600.‍
3. Include it in your tax return
   When you lodge your tax return, include the deduction amount in the relevant section. Easy peasy! But wait, there's more to EOFY than just the IAWO!  Make sure you're fully prepared for tax time by checking out this informative end-of-financial-year checklist.

Get help

Meticulous records of purchases and business use are essential. Consider using AI-powered accounting software like Thriday to streamline this process. Thriday allows you to:

• Scan, send, and save receipts on the go: Capture paper and digital receipts effortlessly with your phone or computer.
• Auto-reconcile with AI: Automatically match receipts to your bank transactions, saving you hours of manual work.
• Smart GST recognition: Ensure accurate BAS and tax calculations.
• ATO audit log: Prepare for audits with confidence, knowing your expense records are secure and readily available.‍

End-of-financial-year planning: The IAWO is just one of many strategies to optimize your tax situation. To explore other year-end tax tips and learn how to make the most of the financial year, check out this EOFY comprehensive guide to save money.

You can also review tax rules and regulations from the ATO website. Seek expert advice if unsure about any aspect of the IAWO or how it interacts with your specific business circumstances.

By utilising AI-powered accounting software and seeking professional advice when needed, you can ensure accurate record-keeping, maximise your deductions, and minimise your tax liability, all while saving valuable time.

By understanding the instant asset write-off and the specific thresholds, you'll be equipped to take full advantage of this tax incentive and potentially save your business thousands of dollars.

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