June 15, 2017

How to improve cash flow this end of financial year

The $20,000 Small Business Instant Asset Write-Off has been extended for another 12 months. Businesses with an aggregated turnover of less than $10 million will be able to take advantage of the write-off until 30 June 2018 provided that the asset was acquired and installed ready for use in your business by this date. The $20,000 write-off was originally introduced on 12 May 2015 and originally applied to small businesses with an annual aggregated turnover of less than $2 million. Recently the write-off was extended to businesses with an aggregated turnover of less than $10 million for assets that were acquired and installed ready for use from 01 July 2016.

To recap, the instant asset write-off allows small businesses to fully deduct virtually all depreciating assets under $20,000 (except horticultural plants, in-house software and buildings) in the year that the asset is acquired and installed ready for use in your business – rather than having the deduction spread out over a number of years. If you miss the deadline (i.e. if the asset is not being used in your business or installed ready for use on or before 30 June 2018) then the write-off threshold reverts to $1,000. Missing the deadline will result in a worse cash flow outcome for your business than if the deadline is met.

Assets costing $20,000 or over continue to be allocated to a general small business pool and are depreciable at a rate of 15% in the first year, and then 30% in subsequent years where the balance of a small business pool falls beneath this $20,000 threshold, the pool can also be written off. This extends to existing pool balances, so be sure to consider this in both the 2017 and 2018 financial years as part of any tax planning initiatives you are undertaking.

The write-off improves small business cash flow by saving income tax by bringing forward deductions rather than having them spread out over more than one year via a depreciation claim. Cash flow can be a significant issue for small business, particularly start-ups.

That said, it is important to have perspective. The amount you recover though the tax system for such a purchase isn’t the full value of the asset, it is the marginal rate of tax you a paying multiplied by the asset value. So, for example, if you acquire an asset worth $18,000 excluding GST in a company with a tax rate of 27.5%, then the tax system relieves you of $4,950 in tax that you might have otherwise paid had you not made that purchase. You have outlaid $18,000 to recover $4,950 in tax. Consequently, you should not let tax distort or blur your commercial instincts…

As we head towards 30 June, the Small Business Instant Asset Write-off is a great way for your business to reduce its 2016/2017 tax payable by purchasing a depreciable asset for less than $20,000 before 01 July and having it installed ready for use by this time.

Originally produced by Australian Bookkeepers Network and reproduced with permission.

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