Please note, parts of this article have been updated and clarified in a later article.
As many people will have heard by now the Federal Government announced several measures to assist the economy in addressing the impact of the coronavirus. A number of these measures will have significant tax benefits for our business clients.
At this stage details are not extensive but the following we believe is a practical summary.
Immediate Write off, Plant & Equipment costing less than $150,000
The biggest impact for our business client taxpayers will be the increased thresholds for the Instant Asset Write-Off (IAWO).
As of 12 March 2020, and through to 30 June 2020 the IAWO is to increase to $150,000 (from $30,000 currently) and the turnover income threshold to be eligible has increased from $50 million to $500 million.
This will apply for new or second-hand assets, first used or installed ready for use in this time frame.
This measure will require legislative change to take effect.
50% upfront tax deduction for New Plant purchases
The second incentive we are focussing on relates to new plant purchases claimed under a specific depreciation method, defined as Division 40 of the Income Tax assessment Act 1997. This incentive is for businesses with a turnover of up to $500 Million and allows a 50% immediate deduction on the purchase cost of new plant and the remainder being depreciated under the normal Capital Allowance regime.
The Capital Allowance regime is a method in which plant is depreciated based on the “effective life” of the plant. The effective life rates are generally determined by referring to the ATO’s published expected life tables. Please note, this is a separate depreciation method to Small Business Entity pooling method.
These incentives do not apply to Capital Works such as building or extensions, alterations or improvements to buildings or second-hand plant items.
This incentive commences on 12 March 2020 and the item must be first used or installed by 30 June 2021.
The following examples illustrate the above rules
Dirt Diggers Pty Ltd is buying a second-hand grader costing $145,000 (plus GST) for use in its earthmoving business. The grader will be delivered and ready for use by mid May 2020.
Dirt Diggers Pty Ltd will claim a tax deduction for the full $145,000 in their 2020 Tax Return.
In future years if Dirt Diggers Pty Ltd were to trade-in or sell this machine it would create a taxable profit on sale. For example, if traded in February 2023 for a value of $95,000 (plus GST), this would result in a taxable profit in the tax return of Dirt Diggers Pty Ltd for the 2023 financial year of $95,000.
This is due to the fact the grader is the full value of the initial purchase price of the grader was immediately written down to $0 for tax purposes.
Eric operates a farm with a turnover of $6m annually. He is buying a new self-propelled boomspray for delivery on 1 June 2020 for $600,000 (plus GST). Since the cost is greater than $150,000 Eric will not receive the Instant Asset Write-Off but may be eligible for the 50% up front deduction.
Eric has two choices:
- He is eligible to utilise the Simpler Depreciation pooling rules for Small Business Entities (<10m turnover) where he would receive a deduction of 15% of the purchase price in the first year, resulting in a 2020 tax deduction of $90,000;
- or He could utilise the 50% upfront deduction and then use the Capital Allowance regime. This would result in a claim of 50% upfront of $300,000 and the balance under the “effective life” depreciation rules of $6,164 ($300,000 x 25% x 30 days/366)> Total deduction claimed in the 2020 financial year would be $306,164.
If in example 2, Eric had purchased a second-hand sprayer unit for $400,000 (plus GST), he would not be eligible to utilise the 50% immediate write off, as it was not a new plant item.
In such a situation his options would have been:
- Simpler Depreciation pooling rules for Small Business Entities resulting in an initial 15% claim of $60,000; or
- Capital Allowances regime resulting in an initial claim of $8,196 ($400,000 x 25% x 30 days/366).
Points to consider with these measures
- Would you ordinarily make the plant purchase regardless of the rule changes?
- Remember if financing the acquisition, you will receive a deduction up front now, but there will be cashflow requirements in the long term with little or no tax assistance in future to match the cashflow.
- This may be a great opportunity to negate profit on sale of already depreciated plant where a trade-in or sale is involved in the purchase.
- If a plant purchase was to be funded from existing cash reserves, this will match the cash outflow with deductions, particularly where the $150,000 IAWO is utilised.
- The new rules could result in existing Small Business Entity Pools being written off in full this year where SBE Pools are valued to $150,000 or less at 30 June 2020. Therefore, creating an accelerated tax deduction without even acquiring new plant.
- If intending to acquire plant to take advantage of the new announcements, be aware of your expected 2020 Taxable Profit to ensure you can make use of the deductions.
- Be mindful that Motor Vehicles still have a depreciation cost limit (2019-20 – $57,581). We are also aware that many dual cab utes and many varieties of Dodge Ram style vehicles are not exempt from these rules.
- It is important to consider these measures are really a matter of timing, only having the impact of bringing forward the value of the tax benefit. You will not be receiving any extra tax deductions, only receiving them earlier then you normally would.
Incentives for Employers
The third incentive to assist our business clients affects employers with under $50 million turnover. They will be entitled to tax-free payments of up to 50% of the PAYG withheld on wages, up to a maximum of $25,000 when lodging the Activity Statements from 28 April 2020.
Eligible businesses that pay salary and wages will receive a minimum payment of $2,000, even if they are not required to withhold tax. This will come into effect on the March 2020 Activity Statement through to the June 2020 Activity Statement.
Supporting Apprentices and trainees
Businesses employing an apprentice or trainee may be eligible for a wage subsidy of up to 50 per cent of wages paid from 1 January 2020 to 30 September 2020. Registration for this subsidy is expected to open in early April 2020.
Eligible businesses may receive a reimbursement up to a maximum of $21,000 per eligible apprentice or trainee ($7,000 per quarter).
To be eligible for this subsidy the business must be employing fewer than 20 full-time employees and retain an apprentice or trainee.
As more detail with these measures become available, we will let you know.