The recent release of the government's latest Federal budget has left many entrepreneurs and small business owners wondering how it will impact them.
In an effort to boost business confidence, a depreciation tax break for asset purchases under $20,000 was introduced and has been one of the most significant points of interest from this year's budget.
For many small businesses, their most significant asset purchases are vehicles, which are included as part of this program.
What is it?
Essentially, the government has decided to lift the cap on the existing accelerated depreciation program from $1,000 to $20,000. For your small business, this means you can claim immediate tax benefits on most business-related assets that you purchase under $20,000.
Vehicles that are to be used for commercial purposes are included in this scheme. Depending on personal circumstances, this increased value of $20,000 could result in your business claiming the full purchase price of a vehicle in the year that it is purchased.
Many business owners are confused about what exactly this means for them at tax time. Here's how it works on your business tax return: If you make a purchase of a vehicle, or any other qualified asset that is under $20,000, it is 100 percent tax deductible in the first year. Previously, this deduction was spread out over a number of years as a depreciation of the asset. In other words, the taxable income of the business is reduced by the amount of the purchased assets, up to $20,000, in the year of purchase.
Who qualifies?
All registered small businesses, including sole traders, partnerships and companies, with an aggregated annual turnover under $2 million are eligible to benefit from these changes.
When to purchase?
There is no need to wait. This scheme has been passed in parliament and began as soon as it was announced on the 12th of May 2015, and is planned to proceed until the 30th June 2017.
What purchases are suitable?
There are very few restrictions on the type of assets that are eligible to qualify for this accelerated depreciation program. Suitable purchases include new and used vehicles that are acquired for business use.
For small businesses not registered for GST, it is important to remember that assets, including vehicles, must be valued up to $20,000 (including GST) to qualify. If the purchase has a higher value, the normal depreciation rules apply whereby the deductions are claimed over a number of years, rather than immediately. Any purchase more than $20,000 will be subject to the existing depreciation rules for the whole purchase amount, including the first $20,000.
What else you need to know...
While businesses that are purchasing vehicles may require car financing, it is important to note that leasing is not covered by these depreciation rules, as the business doesn't technically own the vehicle.
Additionally, business owners will be glad to learn that there is no limit to the number of assets or times that this depreciation can be claimed. If your business needs a number of vehicles, as long as they are each valued under $20,000, they can all be claimed as tax deductions.
While the increase in this accelerated depreciation scheme is set to benefit thousands of business across Australia over the next two years, as always, it is best to consult a financial advisor to ensure that any purchase you make will qualify for this scheme, and to understand the specific financial impact it will have on your business.
About Rob Chaloner
Rob Chaloner is the Founder and Managing Director of stratton, and is passionate about developing smarter ways to buy and finance cars. With stratton, he's working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.
