Why using the 20k Budget tax deduction might be the wrong decision

20k tax deduction budgetSo, your business has a turnover under $2 million and you want to know how to use the $20,000 immediate tax deduction that’s been all over the news? Before you start spending, there are a few things you need to know.

Does your business make a profit?
Deductions are only useful to offset against tax. If your business makes a loss then a tax deduction is of limited benefit because you’re not paying any tax. Losses can often be carried forward into future years but you lose the benefit of the immediate deduction.

Small businesses with a turnover of $2m or below make up 97.5% of all Australian businesses. The latest Australian Taxation Office (ATO) statistics show that well under half of these businesses actually paid tax. That means that the $20,000 instant asset write-off is useful to less than half of the Australian small businesses targeted. So, if your business makes a loss and you start spending to take advantage of the immediate deduction, all you are likely to do is to increase the size of your losses with no corresponding offset.

Cashflow first!
Cashflow is more important than an immediate deduction. Assuming your business qualifies for the deduction, the most important consideration is your cashflow. If there are purchases and equipment that your business needs, that equipment has an immediate benefit to the business, and your cashflow supports the purchase, then go ahead and spend the money. The $20,000 immediate deduction applies as many times as you like for both new and second hand equipment, so you can use it for multiple individual purchases.

But, your business still needs to fund the purchase for a period of time until you can claim the tax deduction and then, the deduction is only a portion of the purchase price.

Is your business eligible?
To use the instant asset write-off, your business needs to be eligible. The first test is that you have to be a business – not just holding assets for investment purposes. The second is that the aggregated turnover of your business needs to be below $2m. This involves grouping related entities.

It’s important not to rely on the advice of the person you are purchasing from. There is a lot of misinformation out there in the market right now and it’s important to know how the concessions apply to you. If in doubt, speak with your RDL advisor.

What has changed from 1 July 2015 for business

  • Small business tax cut – 1.5% for companies and 5% tax discount for unincorporated small businesses under $2m (capped at $1,000).
  • Employee share scheme rule changes to make the schemes more attractive particularly to start-ups.
  • ‘Fly in fly out’ and ‘drive in drive out’ (FIFO) workers will be excluded from the Zone Tax Offset (ZTO) where their normal residence is not within a ‘zone’.
  • Start-ups able to immediately deduct a range of professional expenses required to start up a business – such as professional, legal and accounting advice
  • The way work related deductions for car expenses are calculated will change. The ‘12% of original value method’ and the ‘one-third of actual expenses method’ will be removed. The ‘cents per kilometre method’ will be revised, replacing the three current engine size rates with one rate set at 66 cents per kilometre to apply for all cars
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