Eligibility for the Instant Asset Write Off (IAWO) has changed over time and in recent changes has been extended to 30 June 2021. IAWO is available for eligible entities with an aggregated turnover threshold of up to $500 million. It allows businesses an immediate tax deduction for capital assets acquired.
IAWO has been further extended with another measure known as Temporary Full Expensing which allows a deduction for the cost of the business portion of eligible depreciable assets. A tax deduction is available for new business assets provided aggregated turnover is under $5 billion, and for second hand assets provided turnover is under $50 million. This measure originally ran until 2022 but was extended in the recent budget to run from 6 October 2020 until 30 June 2023.
However utilising IAWO may not always give the best outcome from a tax planning perspective. Claiming an immediate deduction for expensive capital assets could result in a business or business owner dropping into a lower tax bracket or creating or increasing a tax loss. In this case the business won’t get the full benefit of the deduction. In some situations it may be better to apply the usual depreciation rules and spread the deduction over the number of years.
Some other issues to consider before investing in new assets for the business:
- Not all assets are eligible. IAWO does not apply to capital works such as extensions, alterations and structural improvements to a building.
- The car limit still applies to passenger vehicles designed to carry fewer than nine passengers or a load of less than one tonne. This limits car deductions to $59,136 (for 2021).
- From a cash flow perspective it may be better to lease an asset rather than commit to purchasing it outright
- To use IAWO, small businesses must elect to use SBE simplified depreciation rules which does not provide flexibility as everything needs to be written off
Small business currently can choose to use what is known as the Simplified Depreciation rules. These rules include a number of concessions, including IAWO. A small business can opt-out of these concessions and therefore opt out of IOWA, but as a result they lose access to all of the Simplified Depreciation rules.
Author: Elena Grishina