End of ‘Full Expensing’ of Assets
The ‘full expensing’ of assets in Australia, also known as the Instant Asset Write-Off, was extended until 30th June 2023, as part of the Federal Budget for the fiscal year 2022-23.
Full expensing allows eligible businesses to claim an immediate deduction for the full cost of eligible depreciable assets. This tax incentive is aimed at encouraging businesses to invest in capital assets and support economic growth.
What does this mean for business owners?
For business owners, full expensing can provide significant cash flow benefits because you can claim a larger tax deduction upfront, rather than depreciating the asset over its useful life. This could lead to reduced taxable income and potentially lower tax liability for the business in the year the asset is purchased.
When a business takes advantage of the instant asset write-off, they are not required to depreciate the asset. Instead, they can claim an immediate deduction for the entire cost of the eligible asset in the year it is purchased and put into use. This means that the business does not need to spread the cost of the asset over several years through depreciation.
However, once the full expensing provision ends, businesses will need to revert to the standard depreciation rules and claim deductions over the asset’s useful life.
Keep in mind, to use this full expensing provision the asset needs to not only be purchased before 30 June 2023, but it needs to be in use at your business. For example, a company car can’t just be ordered before 30 June 2023 – it needs to be at your business and in use.
It’s important to talk to your accountant about the full expensing provision and how it may affect your business. Issues to look at include:
- Immediate tax deduction – if in loss position there will be no tax benefit
- Cash flow considerations:
- Can it be financed?
- How long will it take to organise finance?
- Do you need the assets now?
Immediate tax deduction:
It is crucial for businesses to assess their current and projected tax positions before taking advantage of the instant asset write-off. If a business is in a loss position, claiming an immediate tax deduction may not provide any immediate tax benefits, as the deduction would only increase the tax loss. In this situation, the business may prefer to spread the deduction over multiple years through depreciation.
Cash flow considerations:
When deciding to invest in new assets, businesses should consider whether they can finance the purchase and the time it takes to arrange the necessary financing. Additionally, they should evaluate if the assets are needed immediately or if the purchase can be deferred. If a business can finance the asset and put it to use promptly, taking advantage of the instant asset write-off may lead to increased cash flow due to a reduced tax liability for that year. However, if the asset purchase can be deferred or financed over a longer period, businesses may prefer to claim deductions through depreciation to match the expense with the asset’s useful life and associated revenue generation.
Asset must be on hand and installed for use before the deadline
When taking advantage of the full expensing provision in Australia, it is essential to note that eligible businesses must have the asset on hand and installed for use before the deadline, which is currently 30 June 2023.
For example, if a business purchases an asset in April, but it is not delivered and put into use until July, the business would not be able to fully depreciate the asset using the instant asset write-off provision. In this case, the business would need to revert to the standard depreciation rules and claim deductions over the asset’s useful life.
It is crucial for businesses to plan their asset acquisitions carefully and ensure that the assets are not only purchased but also delivered and ready for use before the deadline to fully benefit from the instant asset write-off. As always, it is recommended to consult with a tax professional or the Australian Taxation Office (ATO) for the most current information and to determine eligibility for specific tax incentives.
Businesses should carefully analyse their tax and financial positions before deciding to utilise the full expensing provision. Contact us if you would like to discuss your specific circumstances and we can help you determine the most appropriate strategy for your business.
Remember – the full expensing provision deadline is 30 June 2023
What about for the financial year 2023-24? Check out what’s planned for small business new concessions in our federal budget blog.