To spend or not to spend. 8 things to consider before jumping on the $30,000 asset write-off.
The ATO recently increased the instant asset write off to $30,000 for eligible assets purchased from 2 April 2019. But does this mean that you should rush out prior to 30 June 2019 and spend up to get a tax deduction?
Before spending your money … or borrowing to spend money … there are a few things you should consider.
It’s only a tax deduction!
The item that you purchase can be claimed as a single tax deduction in the year that you spend the money rather than as deprecation over 4–5 years. A tax deduction reduces your taxable income which is what your taxation is calculated on. Don’t get sucked into some retailers’ ploys to get you to spend money on the promise that it’s an extra deduction or a refund!
To calculate out the tax benefit firstly you need to work out what tax and medicare rate you are in, for 2019 these are:
|
Income thresholds |
Rate |
Tax payable on this income |
|
$0 – $18,200 |
0% |
Nil |
|
$18,201 – $37,000 |
19% |
19c for each $1 over $18,200 |
|
$37,001 – $90,000 |
32.5% |
$3,572 plus 32.5% of amounts over $37,000 |
|
$90,001 – $180,000 |
37% |
$20,797 plus 37% of amounts over $90,000 |
|
$180,000 and over |
45% |
$54,097 plus 45% of amounts over $180,000 |
Therefore, if you earn $80,000 your tax rate is 32.5% and Medicare levy of 2% is 34.5%.If you buy something that is $10,000 you are eligible for a refund of $3,450 (34.5% x $10,000)effectively costing you $6,550 after tax.
Similarly, if you earn $40,000 your tax rate is 32.5% and Medicare levy of 2% is 34.5% on the amount over the $37,000 once you reduce your taxable income below $37,000 the rate drops from 34.5% to 21% (19% taxation and 2% Medicare levy). Therefore, spending $10,000 will result in a refund of $2,505 ($3,000 x 34.5% + $7,000 x 21%),that is it will cost you $7,490 after tax.
Will you earn more next financial year?
The deduction is claimable in the year that you spend the money. If this is your first year in business or your profit is down, consider leaving the expenditure to next year when you are in a higher tax bracket – it may generate higher taxation savings and be more beneficial.
Consider the price before GST
If you are registered for GST then the value of the item eligible for the asset write-off is the amount before GST. For example, if the purchase price is $33,000 including GST – and you claim back the 10% GST of $3,000 – the price is $30,000.
Installation and on Road Costs are included
The $30,000 limit includes all costs to get it ready for use ie on road costs and installation. For example, if a vehicle costs is $29,500 + $1,000 stamp duty, then the total cost is $30,500 which exceeds the limit. Hence you will need to depreciate the asset over time.
Ask yourself: Do I really need this?
A shiny new tool or super-fast new computer might be highly desirable, but do you really need it? Prior to making that purchase, work out if you really need the item, how much you will use it and the savings that you will make or income you can earn from the item.
If it is a large item then you will also need to consider storage and maintenance. Would hiring the item be a better option?
Would spending more be more beneficial?
If you are looking at a vehicle or other large item and thinking you’ll spend $30,000 in order to claim the write-off, you need to consider if the item at that price point will fully meet your needs. Buying a vehicle that is too small, underpowered, or with poor fuel efficiency may have long term effects and bring about costs that outweigh the short term tax benefit.
If you spend more than $30,000 you still get to claim it as a tax deduction, but over a number of years instead of in one go.
Do you have the cashflow to afford the expenditure?
Will buying the item impact your ability to fulfil future commitments (i.e. taxation)? Remember, as you will only get back part of what you spend on tax you will need to make sure that buying the item doesn’t affect your cashflow and ability to meet your upcoming bills and commitments.
If it is essential for your business immediately and you are worried about cashflow then options like financing the equipment may be appropriate.
Talk to us first!
If you’re considering new equipment that could be eligible for the instant asset write-off, talk to us first. We’ll talk you through if it’s worth it and if it would be better to wait, based on your particular scenario.