Many businesses breathed a collective sigh of relief when the Instant Asset Write Off (IAWO) Scheme was first introduced, due to changing market conditions at the height of the COVID-19 pandemic. The scheme, which has now been extended to 30 June 2023, allows eligible entities to claim an immediate deduction for many depreciable assets, rather than expensing them over their effective lives.

The new rules have been designed to offer temporary tax relief while encouraging businesses to bring forward investments that they may have been looking to make over coming years.

There are some items that need to be considered before utilising these measures, as it may not necessarily be the most tax effective approach in the long run. These are:

  • Cash flow should be reviewed, as investing in an asset sooner than predicted could lessen the funds available for the day to day running of the business now and in future years.
  • Marginal tax rates should be considered. A deduction may result in taxable income dropping into a lower tax bracket. This means that you may not be able to take full advantage of the deduction and it may be less tax effective than traditional depreciation methods.
  • Claiming an immediate deduction will also decrease taxable income to an unusually low rate. This in turn may artificially decrease PAYG instalments the following year, resulting in a larger than usual tax bill.
  • Businesses are advised to look at the long-term effect that IAWO may have on taxable income in comparison to spreading the deduction over the effective life of an asset. If your business is in a break even position, or operating at a loss, there is no real benefit to claiming the deduction out right.
  • When an asset, such as a car, is fully expensed when purchased, it must be remembered that the proceeds on sale need to be declared in full if this asset is sold. This could result in a higher than usual tax bill.
  • If the simplified depreciation rules are used by a Company, and a tax loss results, this loss cannot be distributed to shareholders.
  • If the business is operated by a Trust and goes into a loss position, franking credits on any dividends received will not be able to be utilised.

As always, it is important to consult your Accountant when deciding which approach to take and they will be able to assist you to opt out, should you wish to.

Related Blogs

$150,000 Instant asset write off – do I have to use it?
Company carry back losses – what are the rules?

Author: Joanne Humphreys