How the immediate asset write-off will help small business

Small businesses have welcomed the Government’s proposal to allow them to immediately write-off assets worth less than $5,000, with accountants saying the move will provide tax benefits for thousands of firms.

But experts have also warned the proposal will only apply to companies, so businesses run by either a sole trader or under a trust-type structure will be unable to claim either the write-off allowance, or benefit from the cut in the corporate tax rate to 28%.

Currently, only assets worth under $1,000 are able to be immediately written off. For anything over that amount, the asset can be claimed under the normal depreciation rate, depending on the type of equipment purchased.

The new proposal would see assets up to $5,000 immediately written off, providing an instant tax benefit. Peter Bembrick, tax partner at HLB Mann Judd, says this will help out thousands of small businesses which will now be thousands of dollars better off each year.

“Really, this is just a change in the threshold to what businesses are already used to. Certainly, for small businesses, it makes things a lot easier for buying different types of equipment and it’s going to ease up the pressure on small businesses at tax time.”

The types of assets that can be written off will be the same under the current $1,000 limit. RSM Bird Cameron partner Craig Cooper says this can include “any asset relevant to the business”.

“It could be buying a replacement machine, any type of equipment, furniture and fittings or new computers. It’s any asset which has a necessary connection to your business and is depreciable.”

The Government has used the example of a display refrigerator, purchased for $4,000. Currently, the small business buying the fridge would only be entitled to a $600 deduction in the first year, but under the new proposal the entire $4,000 could be written off.

Additionally, small businesses can benefit from the new “pooling” of assets worth over $5,000, which will now be depreciated at one single rate, rather than a number of different rates.

Currently, assets worth over $1,000 must be depreciated at two different rates – either at 30% or 5% depending on the life of the asset. However, assets above that value will now be pooled together at the 30% rate, which these experts say will dramatically reduce the complexity involved in calculating taxes.

“The effect here is to reduce the overall tax cost for small businesses, and that’s been the benefit for these new proposals. These two proposals drive particular behaviours behind businesses, and that is to get them out there and get them spending.”

However, Cooper warns that not all businesses will be able to access the 2% cut in the corporate tax rate to 28% from 2012, saying only companies will be entitled to the benefit.

“This is what some people have missed. This is going to have some implications because a lot of businesses operate through trusts, or as a sole trader, or through partnerships. The 2% cut is strictly for companies, and businesses need to be aware of that.”