Sunny skies and pots of gold at the end of the SME rainbow.
Businesses with turnover of less than $50 million will now be able to claim an immediate deduction for depreciating assets costing less than $30,000.
This measure extends the Government’s previous instant asset write-off scheme by:
- Extending access to the scheme to businesses with aggregated turnover of less than $50 million (was $10 million);
- Increasing the asset threshold (and immediate deduction) to assets costing less than $30,000 (was $20,000 with the Government previously announcing an increase to $25,000); and
- Extending the operation of the scheme through to assets that are in use, or installed ready for use, by 30 June 2020.
These measures may not pass Parliament prior to the federal election, therefore we recommend businesses not undertake unnecessary asset purchases prior to the federal election in May 2019.
- Access to the instant asset write-off to be extended to taxpayers with turnover under $50 million
- The asset value threshold will also increase to $30,000
- Applicable to assets purchased after the Budget announcement (2 April 2019) and used, or installed ready for use, in a business before 30 June 2020.
- Small to medium sized businesses looking to buy new equipment or upgrade existing equipment in the next 15 months.
- Businesses currently running at a tax loss will still get a deduction for assets purchased, but will not obtain a cash flow benefit from the deduction until carried forward tax losses are able to be recouped.
Perfect Pastries Pty Ltd has an aggregated turnover of $20 million and a taxable income of $800,000 for the 2019-20 income year. In previous years, Perfect Pastries Pty Ltd’s turnover was too large, and it could not access the instant asset write-off. The Budget announcement will now allow Perfect Pastries to access the instant asset-write-off.
On 1 July 2019, Perfect Pastries purchases 10 new commercial ovens to allow for increased production, at a cost of $12,000 each.
Under the new $30,000 instant asset write-off scheme, Perfect Pastries would claim an immediate deduction of $120,000 for the purchase of the 10 ovens in the 30 June 2020 income year. The cashflow benefit of this tax deduction would be $33,000 ($120,000 x 27.5%), and the company will obtain the cashflow benefit (through a reduced income tax liability) when it lodges its tax return for the 2020 year.
If these assets were instead purchased on 1 July 2018 (prior to the Budget announcement), Perfect Pastries would depreciate the new ovens using an effective life of 15 years, claiming a tax deduction of $1,600 per oven (diminishing value), resulting in a total deduction of $16,000 for the 2018-19 income year. The cashflow benefit of this tax deduction for Perfect Pastries would only be $4,400 ($16,000 x 27.5%).
The Division 7A rules are broadly designed to ensure that private companies do not make tax-free distributions to shareholders or associates by way of payments, loans or forgiveness of loans.
The rules have broadened significantly since their introduction in December 1997 to include certain arrangements involving trusts and private companies and use of private company assets for less than market value payment.
The Government had previously announced it would substantially overhaul the operation of the Division 7A rules as follows:
- simplifying the Division 7A loan rules to make it easier for taxpayers to comply, including the removal of the requirement for loan agreements to be in writing;
- requiring all existing seven year and 25 year Division 7A loans, and all future Division 7A loans to have a loan duration of 10 years, while better aligning the calculation of the minimum interest rate with commercial transactions;
- replacing the requirement to apply for ATO discretion for Division 7A mistakes and errors with a self-correction mechanism giving taxpayers the opportunity to voluntarily correct their Division 7A arrangements without penalty;
- simplifying the private company asset use rules by introducing safe harbour measures;
- ensuring that unpaid present entitlements from trusts will come within the scope of Division 7A.
- The commencement date for previously announced Division 7A measures will be delayed until 1 July 2020
- The Government will undertake additional consultation with various stakeholders to ensure the new rules are appropriately targeted and implemented with transitional arrangements
- Private companies with significant existing Division 7A loan balances, and “quarantined” pre-Division 7A and pre-December 2009 unpaid present entitlements get an additional 12 months grace to transition to the new rules. RSM hopes that there will be further transitional relief available for these companies.
- Private companies who are left waiting for further guidance from the Government on what amendments will be made to the Division 7A rules.