There were two groups which were heavily talked about in the analysis of the recently announced 2015 budget – small business and tradies.
Of course most tradies are small businesses. So what exactly are the benefits from the latest budget? Well, the one getting the most attention is the $20,000 instant asset write-off.
$20k Instant Asset Write-off
One of the big points in the budget was the instant asset write-off for small business.
For the purposes of the budget, a small business is one that has a turnover of less than $2 million per year. A range which most tradies will fit into.
The instant asset write-off means that small businesses and tradies can purchase items up to a value of $20,000 and claim a deduction on the full amount in their next tax return.
The way that this has been promoted has resulted in some people thinking they are getting a $20,000 cash back. This is not the case, you receive only the tax you paid on that $20,000.
Normally when you buy expensive machinery or equipment you can depreciate it each year and claim a tax deduction on the amount it has depreciated.
Previously, if the item was valued $1,000 or less you could claim the full amount straight away and for items greater than $1,000 you would have to depreciate them over multiple years, meaning that the tax deduction would be spread out.
With this new initiative the bar is being raised to $20,000. So you can purchase an item up to $20,000 at get an immediate tax deduction.
How Much Is The Deduction?
Returns vary from $5400 to $8500 depending on your personal and business situation. If you are a sole trader paying tax in the maximum bracket of 47 cents of every dollar then you stand to gain the most back. Companies with a turnover not exceeding $2 million may be eligible for an instant tax refund of 30 cents in the dollar.
On a $20,000 purchase the tax will be $6,000. That’s certainly a nice deduction to get back at tax time!
For those who wait until next financial year, the Budget has lowered the small business tax rate to 28.5% for purchases on or after 01 July 2015, meaning those purchases will be deductible at a lower rate.
Is it Worth It?
It may be tempting to rush out and spend up on new tools for the trade, equipment or even a new ute. Indeed, many car brands are pricing them accordingly as vehicles over 20k must use the depreciation method.
And that’s exactly what this measure is supposed to promote. The government wants the economy ticking over, but there are a couple of points to keep in mind.
Firstly, making purchase decisions based purely on gaining a tax deduction is not a great strategy. Throwing $20,000 at new gear and scoring a tax deduction of between $5400 and $8500 may sound great in theory, but you’ll still be spending $14,300 on something. If you really need the item then great. Or even if you will need it in the forseeable future. At the moment, you have until the end of June 2017 to take advantage of the incentive.
Also worth considering is that the Government is not actually giving you any more money than before. The only change is that you’re getting it back sooner.
It’s certainly not a bad thing, especially if you need the gear but it’s not necessarily a reason to rush out and spend $20,000 for the sake of it.
Trade Risk are specialists in insurance, but not taxation. The information in this article is general in nature and you should consult with your accountant before making any decisions.