Michelle Maynard, Partner at Carbon Accountants and Business Consultants, discusses whether businesses should rethink taking advantage of the Small Business Instant Asset Write-Off before 30 June. The incentive is anything but instant in providing its modest return on the money spent, she writes.
As it comes to the end of the Financial Year, businesses start to look to ways to reduce their tax bill. One of the most common things Accountants are asked is, “Should I buy things before 30 June to get the tax deduction?”
While it can be appealing to think they were saving on tax bills, the tax refund from the acclaimed instant asset write-off is a little over one-quarter of what the business operator has to fork out to get the deduction. This is because the Federal coalition has been successful in not only continuing the generous write-off scheme (now assets up to $30,000 can be immediately written off) but also in getting support for cutting the small company tax rate to 27.5 per cent.
Many business owners are motivated by tax deductions because they were under the wrong impression they were refunded a dollar for each dollar spent. However that is not the case.
An asset that costs $30,000 will only result in a tax refund of $8250. And while the incentive is called “The Small Business Instant Asset Write-Off” it is anything but instant in providing its modest return on the money spent.
The cash benefit of any write-off is not returned until the tax return is lodged and any refundable amounts were sent to the business owner. Business owners needed to keep the delay in mind when considering equipment purchases, their financial situation and any tax refunds that might ease the burden.
Such delayed write-offs might be manageable in big corporations with sophisticated finance, but big equipment purchases can place stress on the cash flow of smaller businesses. Therefore it is important for Small Businesses to understand, purchases of equipment should not be done solely with a tax refund in mind.
Especially when these purchases are funded with finance. Not many small businesses have surplus cash to be able to fund large purchases from their own pockets. With equipment finance, the tax benefit is reduced even more. And the business is left to make repayments long after the tax benefit has been received.
Below we have modelled a $20,000 purchase, financed over 5 years at 9% in a corporate structure with a tax rate of 27.5%.
You will see, even with the tax deductibility of the interest and the instant asset write off, the after tax cost, on a $20,000 piece of equipment is still $18,060.
It is vital that Businesses understand the total cost of purchasing a piece of plant and equipment. Of course, if the item is needed in the business, it is better to bring that purchase forward before 30 June. However purchasing items that are not particularly needed, especially if they are funded with finance, is not the best tax strategy if we look at the overall cost.
Michelle Maynard partnered with Carbon in 2017, bringing a wealth of experience in accounting and bookkeeping. Her extended suite of services covers everything from tax accounting, planning and estimates, to cloud integration, payroll and SMSF. Michelle started her career as a cadet in the Australian Taxation Office, then as a graduate at PwC. Before joining Carbon, she was a manager at PKF, bringing a wealth of knowledge and experience to the team at Carbon. Michelle specialises in providing tax and accounting advice to SMEs and HNWIs and their family groups, working to achieve the most effective strategies for them, both financially, tax effectively, and to help achieve their desired lifestyle. You can contact Michelle at Michelle.firstname.lastname@example.org or connect via LinkedIn