There are many effective tax breaks, but for a small business, or a sole trader, none comes even close to the $150,000 instant asset write-off scheme. Small businesses are allowed to claim an instant tax deduction on all assets for business use that amount up to the total value of $30,000. According to the ATO (Australian Taxation Office), anything bought within this amount is deductible, from office supplies to motor vehicles.
The eligible businesses are within an aggregated turnover of up to $500 million in total.
ATO’s Instant asset write-off up to $150,000
During the years there have been numerous changes made by the ATO regarding this concrete scheme, however recently, from March 12, 2020, until 31 December 2020 the amount you can instantly write-off from your business taxes is up to $150,000. In contrast, just a few years ago that amount used to be $30,000 until the start date. And was even down to just $1,000 at times. Taking advantage of this scheme can allow a sole trader or a small business to afford a new car without disrupting their steady cash flow.
In order for the business owner to claim the deductible amount, they need to be eligible by certain criteria formed and publicly published by the ATO.
- You aggregated turnover to be less than $500 million.
- The Instant asset write-off up to $150,000 is available only until January 1st 2021, afterwards, the threshold would be $1,000 and would be available only to small businesses with an annual turnover of less than $10 million.
- All the purchased items need to be used for business purposes.
- The cost of the assets purchased need to be less than the announced threshold for the period.
- The date of purchase of the new car needs to be within the given time period (12th March 2020 to 1st of January 2021)
Leased cars taxes are also tax deductible, and some business leasings allow you to deduct all the way up to 50% of the taxes on the rental.
ATO’s Instant Asset Write-off is GST exclusive
GST exclusive means that if you see the price of an asset at $20,000 plus GST, the real price of the car is $22,000. 20% GST.
A good thing to know is that the GST (If you are registered for GST credit) of the new car is capped at $57,581 for the 2019-20 tax year and would be capped at $59,136 for the upcoming year of 2020-2021. For example, if you are using a motor vehicle that was bought at the cap and you use it 75% of the time for business use, thanks to the instant asset write-off scheme, you would be able to deduct 75% of the car cost, which amounts to $43,186. The other 25% are assumed to have been for personal use and are not deductible in that case.
Used motor vehicles are also included in the instant asset write-off scheme, meaning you can still get something more expensive than the limit if you find it second hand at a lower price.
Business vehicles’ costs for depreciation are also capped at the same initial car cost amount – $57,581.
Some business owners might think that it is a good idea to trade in your already used motor vehicle for an exchange of a discount of the new car’s purchase price. Some car dealerships permit that. But the tax agents do not.
On the other hand business expenses contain different car expenses such as: servicing, car costs, running costs, gas used written in the logbook, and repairs.
Disclaimer: Your vehicle would still be considered as purchased on the full price it was estimated by the tax professionals.
Responsible Private Use of a Motor Vehicle
As a small business in Australia, if you spend $50,000 on a business asset and 50% of it amounts to your private use, you would be able to use the remaining $25,000 for a total tax-deductible of 20% which is $5,000. Similar car purchases need to be considered beforehand in case you are going to exploit the vehicle for private use rather than business.
Beware of the fringe benefits tax which is required by the Australian Taxation office, when an employee is allowed to take the motor vehicle for private use. During the Covid pandemic, the ATO has released an updated version and sometimes you might get exempt from the fringe benefits tax.
Otherwise there are certain scenarios in which the employer does not need to pay the tax such as:
- Travel between work and home.
- There is a form of incidental travel.
- Non-work related short trips that are irregular such as taking the rubbish out with the motor vehicle.
Pay attention to ATO’s announced instant asset write-off period
Tax Laws change, and even more the exact periods and maximum amounts that can be instantly written-off are announced on ATO’s website. And if you are planning on acquiring a vehicle for business use, make sure to do it in the right period, after you have checked that you are eligible according to the posted criteria.
When the current period of $150,000 ceiling the amount drops all the way to $1,000 and for the moment it is undisclosed how much the next amount would be when the $1,000 period after 1st of January 2021 ends.