Instant Asset Write-Off (IAWO). What is it?

For those unfamiliar with this term, instant asset write-offs (IAWO) allow for eligible businesses, sole traders, partnerships or trusts to write-off or deduct their business-related assets or the business portion of their depreciable asset(s). If the total sum of the purchased asset(s) fall below the threshold of that particular year, the cost can be written-off. Assets that exceed the threshold can be placed under the pooling rules or depreciated over a number of years.

IAWO Extension Granted

As the instant asset eligibility criteria and thresholds are constantly changing over time. Eligibility to use instant asset write-off on an asset would mostly depend on:

your aggregated turnover (the total ordinary income of your business and that of any associated businesses)
the date you purchased the asset
when it was first used or installed ready for use
the cost of the asset being less than the threshold

If you run a small business and choose to use the simplified depreciation rules, you must use instant asset write-off on all eligible assets.

Businesses with an aggregated turnover of $500 million or more are not eligible to use instant asset write-off.

EXTENDED NEWS

In response to COVID-19, the government had announced that the IAWO threshold of $150,000 would be extended to 31 December 2020 for eligible new or second-hand assets. That meant an additional 6 months for businesses to make use of this benefit.

Recently the government had made another announcement in the recent federal budget that this period would be further extended by another 6 months, ending on 30 June 2021.

THE ISSUE

THE BIG NEWS

On 6 October 2020, the government introduced an unexpected change to the IAWO cap. It was announced that businesses with an aggregated turnover of less than $5 billion could be eligible for an immediate deduction of their depreciable assets purchased from 6 October 2020 (commencing from 7:30pm AEDT). Other factors that must be included in determining the eligibility of the asset itself include:

whether the asset was first used or installed ready for use by 20 June 2022 (at the latest).
whether or not it is a new depreciable asset or is the cost and improvement to an existing eligible asset (unless the taxpayer qualifies as a small or medium business, in which the asset can then be second-hand).

To further touch on this news, the ‘lock-out rules’ which had previously been put in place to prevent Small Business Enterprises (SBEs) that opted out from Div 328 from re-entering for five consecutive years, have been temporarily suspended. The suspension period is expected to run from 12 May 2015, up until 30 June 2021. This will enable more SBEs to reap the benefits of the new IAWO rules.

TO SUMMARISE

If you opted out prior to 12 May 2015, then you would have been ‘locked out’ for the next 5 consecutive income years
SBEs that had opted out in 2019-20 would be able to opt back in for 2020-21
These lock-out rules that occurred back in 12 May 2020, have been temporarily suspended until 30 June 2021
For SBEs that choose to opt out in 2020-21, they will be locked out until 2025-26

The government announcing an uncapped immediate write-off for your depreciable assets seems like nothing but good news, but is it really?

Looking at the working example below, a Sole Trader A (in Figure 1.0) who had opted in for the IAWO only requires paying $1,292 tax for their depreciable asset in the first financial year. For those who are money tight due to the COVID-19 pandemic, this seems like a good option when comparing it to Sole Trader B (in Figure 2.0), who opted out and had to pay $5,000 tax on his depreciable asset.

However, in the long run across the five consecutive income years, Sole Trader B only paid total of $25,460, in comparison to Sole Trader B who paid $28,160, making them have a difference in tax of $2,700.

EXAMPLE 1

In this particular example, we are comparing two companies: Company X (in Figure 3.0) and Company Z (in Figure 4.0). Although Company X, which opted into IAWO pays only $6,500 tax for their first year and $13,000 for each following year up until 2025 income year, the tax that is required to be paid is still $58,500. In comparison to Company Z, there is no difference in the total amount of tax payable for the five (5) year period. The reason being, is that companies using the normal depreciation rate yave a tax rate of 26%, which makes this possible.

EXAMPLE 2