Small business tax deduction changes

New laws have passed that allow small businesses to claim an immediate deduction for assets they start to use – or have installed ready for use – provided each depreciable asset costs less than $20,000. This will temporarily replace the previous instant asset write-off threshold of $1,000.This measure starts 7.30pm (AEST) 12 May 2015 and will end on 30 June 2017.

How this will help Australian small businesses

Small business with annual turnover of less than $2 million

Sam owns a bakery, which he runs as a company in a country town in north Queensland. Sam purchases a new rack oven for $13,750 and a new proofing cabinet for $3,500 to replace his old, worn-out equipment.

Current law

Because these assets each exceed the current $1,000 threshold, they would be included in the accelerated depreciation 'pool'. Of their combined $17,250 cost, only 15 per cent, or $2,588, would be depreciated in the first year. With a company tax rate of 30 per cent, this means that Sam's company would only get $776 back on its tax in the first year.

New law

Under the new $20,000 threshold, Sam's company will be able to claim an immediate deduction for both the new rack oven and the new proofing cabinet, giving an immediate deduction of $17,250. With the new small business company tax rate of 28.5 per cent from 1 July 2015, Sam's company will get $4,916 back on its tax.

Benefit

Under the new $20,000 threshold for accelerated depreciation, Sam's company will receive an additional cash flow benefit of $4,140.

Current law New law Additional Benefit
Depreciation deduction $2,588 $17,250 +$14,662
Cash flow benefit* +$776 +$4,916 +$4,140

*cash flow benefit equals depreciation times the tax rate. Sam also benefits from the reduction in the tax rate for small companies, from 30 per cent under the current law to 28.5 per cent under the new law.

PLUS other taxation benefits

Sam may also be eligible for a range of other taxation benefits including:

  • small business concessions on capital gains tax
  • simplified accounting and reporting arrangements
  • immediate deduction for certain pre-paid business expenses
  • option to account for GST on a cash basis
  • option to elect for annual apportionment of some GST input credit
  • option to pay GST by quarterly instalments
  • PAYG instalments based on GDP-adjusted notional tax