INSTANT ASSET WRITE OFF EXPLAINED (5 min read)
In our earlier blog post we briefly discussed the Instant Asset Write Off and how it has been increased from $150,000 to have no cap for assets purchased from 6 October and installed ready for use prior to 30 June 2022. This has now been passed through parliament and before you rush out and go shopping we want to clear up a few misconceptions that you need to know.
The immediate asset write off is not a refund in cash.
If you are in a loss position the write off only increases your losses - put simply don't do it.
If you don't have the cash and are struggling financially at the moment it is not recommended to borrow to finance the asset just to obtain a tax deduction
Motor Vehicles are excluded from this increase with a cap of $59,136 (2021).
The benefit of the tax deduction doesn't flow until you lodge your tax return which would be (at the earliest July 2021).
The way that tax deductions work for example in a company that pays 27.5% in income tax is that for every $1 of deductions it reduces your tax by 27.5c (assuming you are profitable and not making losses).
Example 1 - company making profits:
- company has profit of $100,000
- company would ordinarily be paying tax of $27,500
- if the company purchases an asset for $100,000 using the immediate asset write off they can deduct the whole $100,000 which has saved $27,500 in tax
Example 2 - company with losses:
- company has a loss of $100,000
- company would ordinarily be paying tax of nil as it has made a loss
- if the company purchases an asset for $100,000 using the immediate asset write off they just add the $100,000 to the losses which means the company has carry forward losses of $200,000 and they don't save anything on tax this year by purchasing the additional asset. The company does however have the ability to carry these losses forward and will only pay tax in the following year on profits over $200,000. There are new loss carry back rules just announced in the budget that affect this but more on that later.
If you are looking to purchase new assets and would like help with a cash flow forecast, or if you have any more questions regarding the above please contact us on 02 9030 0269.
Founder & Director
Two Sides Accounting
02 9030 0269