The Treasury Laws Amendment (increasing the instant asset write-off for small business entities) Bill 2019 received Royal Assent on 6 April 2019 and is now law.  The Bill in its original form proposed to increase the instant asset write-off threshold to $25,000 from 29 January 2019 and extend the eligibility period to 30 June 2020. 

On budget night, the Government announced a further increase to the instant asset write-off threshold up to $30,000 for business use assets purchased from 7.30pm AEST 2 April 2019; and to extend the measure to medium sized businesses with aggregated turnover less than $50 million.

While the measures are welcome, they add a new layer of complexity for both small and medium size business taxpayers alike. Not only is this due to the various instant asset write-off thresholds and staggered commencement dates, but also the definition of medium size business included in the Bill.

Small business taxpayers

Under the Income Tax Assessment Act 1997 (ITAA 1997) a taxpayer will be a small business taxpayer if (in general) they: asset_31.png

  1. Carry on a business; and
  2. Have an aggregated turnover of less than $10 million.

A small business taxpayer who meets the criteria may elect to use the small business simplified depreciation rules under Subdivision 328-D of ITAA 1997.  If the small business taxpayer elects to use the simplified depreciation rules, they will be eligible to claim the instant asset write-off. 

If the small business taxpayer does not elect to use simplified small business depreciation, they may not eligible to claim the instant asset write-off.

On first glance, a small business taxpayer who elects to use the simplified depreciation rules will need to consider the following instant asset thresholds and start dates to assess if asset purchases are eligible for the instant asset write-off.

Period

Instant asset write-off threshold

1 July 2017 to 29 January 2019

$20,000

29 January to 7.30pm AEST 2 April 2019

$25,000

7.30pm AEST 2 April 2019 to 30 June 2020

$30,000

Small business taxpayers who do not elect to use simplified depreciation (i.e. pooling) are not currently eligible to access the instant asset write-off and it is unclear at this stage if they may be able to access the measure under the changes introduced for medium-sized businesses. 

In line with budget night announcements, medium size businesses will be able to access the instant asset write-off without the requirement to use small business simplified depreciation. Though, on first reading, the definition of medium size business specifically excludes a small business taxpayer. This means that small business taxpayers who do not pool depreciating assets may be left out in the cold.

Medium size business taxpayers

In order to determine eligibility for a medium size business to access the instant asset write-off, taxpayers must refer to the eligibility criteria for a small business taxpayer, substituting the existing $10 million aggregated turnover threshold with the $50 million turnover threshold for medium size businesses. instant asset write-off

Provided a medium size business has aggregated turnover of less than $50 million and is carrying on a business, the business will be able to access the instant asset write-off from 2 April 2019.

I’ll tell you where the concern lies. When changes to the corporate tax rate were introduced in 2017, a corporate taxpayer could access the lower tax rate if they met the aggregated turnover test and were carrying on a business.  This then created confusion from a case law perspective as a company could be deemed to be carrying on a business if it held company assets for making a profit.  As a result, passive investment companies could access the lower corporate tax rate. 

On 4 July 2017, then Minister for Revenue and Financial Services, Kelly O’Dwyer issued a media release stating “…the policy decision made by the Government to cut the tax rate for small companies was not meant to apply to passive investment companies.”  This led to the introduction of a definition of base rate entity and the requirement for a company to meet both the aggregated turnover threshold and base rate entity passive income threshold to access the lower company tax rate.

Yet here we have a tax measure that merely requires the medium size business (which may be a company) to meet the $50 million aggregated turnover threshold and be carrying on a business.  Which means, in theory, a passive investment company that meets the medium size business criteria under the instant asset write-off Bill, will be able to access the instant asset write-off from 7.30 pm AEST 2 April 2019.

Which begs the question for a passive investment company, what constitutes a business use asset for the purposes of accessing the instant asset write-off?

The intention of the Government in this regard is questionable and I recommend caution when purchasing assets as no doubt we will hear more from the Government and the ATO on the interpretation of the most recent change to the instant asset write-off legislation.

Important consideration

We note that the instant asset write-off does not apply to capital works, software pools and some other assets which are depreciated under specific provisions.  An adjustment will also be required for dual use assets (i.e. business/personal) and determining the business percentage may be problematic.  Companies and employers will also need to consider the application of Division 7A and FBT for assets which may be eligible for the instant asset write-off but have dual use.

We strongly recommend that taxpayers looking to access the instant asset write-off seek advice from their tax advisers before purchasing assets to ensure they meet the eligibility criteria.