How Instant Asset Write-Offs Can Benefit Your Business This EOFY

In May 2023, the Australian government announced a tax benefit that affects small business entities nationwide: a temporary increase in the instant asset write-off threshold.

According to the Australian Taxation Office (ATO), small businesses can do an immediate deduction of eligible assets costing $20,000 and less. An eligible asset must have been first used or installed ready for use between 1 July 2023 and 30 June 2024.

This write-off threshold applies to multiple assets, making it beneficial for a small business aiming to save costs by the end of the financial year (EOFY). But why do these tax deductions matter?

This guide discusses the cost threshold, rules for instant asset write-offs, and how they can help your small business save money. 

Instant Asset Write-Offs Explained

Instant asset write-offs are a tax deduction strategy allowing eligible businesses and sole traders to have eligible assets immediately deducted as a business tax return rather than these items becoming depreciating assets.

What is a depreciating asset? This refers to any business-related item that’s bought at full cost and loses value over time. For example, restaurants do instant asset write-offs on tables and chairs as they lose value by EOFY.

After purchasing an asset, you can deduct the full cost of it from your taxable income that year, reducing your tax liability. However, ensure that the asset’s entire cost doesn’t exceed $20,000.

Instant asset write-offs apply to multiple asset purchases within the same income year, and the threshold applies per asset.

Exceeding The Threshold

If an asset exceeds the asset write-off threshold, its value goes into the small business simplified depreciation pool. Its value lessens as follows:

• 15% in the same income year
• 30% each following income year

If you choose not to put an asset into the small business general pool, temporary full expensing rules apply.

Temporary full expensing removes the instant asset write-off threshold, benefiting businesses with an aggregated turnover of less than $5 billion.

However, not every asset acquired can be written off for business purposes. Check the eligibility rules for assets before you potentially deduct them wrongly. 

Eligibility Criteria

Before you can claim an asset’s cost for a taxable purpose, ensure it matches these criteria:

• The assets acquired must be first used or installed ready for use between 1 July 2023 and 30 June 2024.
• The small business entity must have an aggregated annual turnover of less than $10 million, based on the current year or previous year figures.
• The small business must choose to apply the simplified depreciation rules for the 2024 income year.
• The asset must have been used for a taxable purpose, such as to produce assessable income.
• The asset must cost less than $20,000.
• The small business or sole trader must operate under general principles in the 2024 income year.

Current Threshold For Instant Asset Write-Offs

Previously, the instant asset write-off threshold was $1,000. The $20,000 increase only applies to assets used or installed ready for use from July 2023 to June 2024; any delays render them ineligible.

Another term to remember is lock-out rules, which prevent small business entities from re-entering the simplified depreciation regime if they opt out of the previous year.

However, the new rule suspends lock-out rules so they can re-enter within the date range.

This change potentially benefits businesses that want to take advantage of the new instant asset write-off incentive and immediately deduct specific assets. If they choose not to opt in, they cannot re-enter until 2030.

Capital works rules are separate from an instant asset write-off. Renovation costs can be claimed at a statutory rate of either 2.5% or 4%, whichever is applicable.

Car Limit

The ATO also sets a specific car limit of $150,000 for vehicle-related expenses, falling under the temporary full expensing rules.

If you use your vehicle for 75% business use, you can claim 75% of its cost.

Simplified Depreciation Rules For Small Businesses

Simplified depreciation rules ease depreciation provisions for small businesses, letting them write off assets rather than lessening their value due to accelerated depreciation.

A business’s pool balance is where the value of assets is placed.

These pools spread the depreciation deduction over time, making tax obligation management easier. Since not every asset fits the instant asset write-off limit, allocating their values and writing off the full pool balance is an alternative.

If you pool your depreciating assets, you can claim 15% in the first year and 30% in the following years. If the closing pool balance is below $20,000, you can either:

• Write off the entire pool balance
• Claim it as current-year depreciation deductions

However, assets purchased between 7:30 pm AEDT on 6 October 2020 and 30 June 2023 have no pool balance threshold, letting you deduct the entire amount.

By pooling your assets, you can claim a portion of the pool’s balance annually.

Instant Asset Write-off Benefits

Apart from potentially lowering tax costs, instant asset write-offs can offer the following benefits.

1. More Flexible Payments

Instant asset write-offs make asset investment more flexible by providing a tax benefit right away rather than leading to asset depreciation.

With immediate deductions, you can focus on improving your cash flow, invest in better assets, and increase your aggregated turnover.

2. May Potentially Lower Tax Payments

An instant write-off asset can reduce your taxable income, potentially lessening your tax liability.

This benefit typically reduces the amount a business pays in taxes, possibly saving thousands in expenses.

3. Can Bring Down The Cost Of Purchasing Assets

With an instant asset write-off, businesses can deduct the entire cost of a qualified asset within the year it was purchased, lowering the net cost of buying the asset.

The tax savings from the instant deduction can reduce overall expenses for this asset, letting businesses potentially channel their savings into better investments.

4. Can Apply To Different Asset Types

The instant asset write-off commonly applies to various asset types, provided that they are used for business purposes.

This will differ per industry, but whether you buy office furniture, cooking equipment, tools, or in-house software, they may be written off during tax season if they cost $20,000 or less.

Conclusion

If your business has an aggregated turnover of less than $10 million with various assets under $20,000, utilising the instant asset write-off strategy may be beneficial for saving costs, investing in future assets, and lessening your required tax payments.

Business owners can also consider consulting a licensed expert for tax advice before writing off assets exceeding the threshold.

Need extra money to buy tax deductible business assets and take advantage of this year’s instant asset write-off incentive?

Make your money work harder this EOFY with the Lumi Business Line Of Credit, which is the ultimate money-on-demand finance solution for your business’s EOFY purchase needs. The best part? It provides full flexibility at 0 risk, meaning you can spend as much or as little as needed and only pay for what you actually use. No additional or ongoing fees. 

If you’re ready to apply for a Business Line Of Credit, click here.

Got more questions? Get in touch with our friendly team via phone at 1300 005 864 or email sales@lumi.com.au.

Disclaimer: We try our best to fact-check all information and keep it up-to-date, but this can not be always guaranteed. All of the information shared is for general use only and should not be considered personalised financial advice. Make sure to consult an accredited accountant and/or tax agent for personalised advice on matters related to your business’s or personal finances.