Investment Incentives For Business
OnVenture welcomes the Australian Government’s stimulus package to introduce financial stimulus measures for business which has now passed through parliment including these investment incentives. While we all do our best to stay resiliant through this Coronavirus crisis we also need to be realistic about how effective these measures will be given that many businesses have already been shut down and many more are likely to do the same soon. Its expected there will be more initiatives from government and future assistance will likely be more targeted to specific industries most effected by Coronavirus health policies.
The following is what I found through the Institute of Public Accountants which has some handy examples.
Increasing the instant asset write-off
The government is increasing the instant asset write-off (IAWO) threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020. In 2017-18 there were more than 360,000 businesses that benefited from the current IAWO, claiming deductions to the value of over $4 billion.
The IAWO threshold
The higher IAWO threshold provides tax reduction benefits for businesses that will be able to immediately deduct purchases of eligible assets each costing less than $150,000. The threshold applies on a per asset basis, so eligible businesses can immediately write-off multiple assets.
The IAWO is due to revert to $1,000 for small businesses (turnover less than $10 million) from 1 July 2020.
Eligibility
The Government is expanding access so that more businesses can take advantage of the IAWO. The annual turnover threshold for businesses is increasing from $50 million to $500 million. Expanding the threshold will mean an additional 5,300 businesses who employ around 1.9 million Australians will be able to access the IAWO for the first time.
Timing
This proposal applies from 12 March 2020 until 30 June 2020, for new or second-hand assets first used, or installed ready for use in this timeframe.
Example 1 — Business benefits from increased asset threshold
Owen owns a company, ON Point Farms Pty Ltd, through which he operates a farming business in the Central Wheat Belt of Western Australia. ON Point Farms Pty Ltd has an aggregated annual turnover of $25 million for the 2019-20 income year. On 1 May 2020, Owen purchases a second hand tractor for $140,000, exclusive of GST, for use in his business.
Under existing tax arrangements, ON Point Farms Pty Ltd is not able to immediately deduct assets costing more than $30,000 and instead would depreciate the tractor using an effective life of 12 years. Choosing to use the diminishing value method, ON Point Farms Pty Ltd would claim a tax deduction of $3,899 for the 2019-20 income year.
Under the new $150,000 instant asset write-off, ON Point Farms Pty Ltd would instead claim an immediate deduction of $140,000 for the purchase of the tractor in the 2019-20 income year, $136,101 more than under existing arrangements. At the company tax rate of 27.5 per cent, Owen will pay $37,427.78 less tax in 2019-20.
This will improve ON Point Farms Pty Ltd’s cash flow and help his business withstand and recover from the economic impact of the Coronavirus.
Example 2 — Business benefits from increased turnover threshold
Samantha owns a company, Sam’s Specialty Roasters Pty Ltd, through which she operates a large food processing business in Brisbane. Sam’s Specialty Roasters Pty Ltd has an aggregated annual turnover of $150 million for the 2019-20 income year. On 1 May 2020, Samantha purchases five new conveyor belts for her production facility for $40,000 each, exclusive of GST, for use in her business.
Under existing tax arrangements, Sam’s Specialty Roasters Pty Ltd is not eligible for the instant asset write-off and instead would depreciate the conveyor belts using an effective life of 15 years. Choosing to use the diminishing value method, Sam’s Specialty Roasters Pty Ltd would claim a total tax deduction of $4,456 for the 2019-20 income year.
Under the new $150,000 instant asset write-off, Sam’s Specialty Roasters Pty Ltd would instead claim an immediate deduction of $200,000 for the purchase of the conveyor belts (i.e. $40,000 for each conveyor) in the 2019-20 income year, $195,544 more than under existing arrangements. At the company tax rate of 30 per cent, Samantha will pay $58,663.20 less tax in 2019-20.
This will improve Sam’s Specialty Roasters Pty Ltd’s cash flow and help her business withstand and recover from the economic impact of the Coronavirus.
Backing business incentive (BBI)
The Government is introducing a time limited 15 month investment incentive to support business investment and economic growth over the short-term, by accelerating depreciation deductions. The key features of the incentive are:
- benefit — deduction of 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost;
- eligible businesses — businesses with aggregated turnover below $500 million; and
- eligible assets — new assets that can be depreciated under Division 40 of the Income Tax Assessment Act 1997 (i.e. plant, equipment and specified intangible assets, such as patents) acquired after announcement and first used or installed by 30 June 2021. Does not apply to second-hand Division 40 assets, or buildings and other capital works depreciable under Division 43.
Eligibility
Businesses with aggregated turnover below $500 million, purchasing certain new depreciable assets.
Timing
Assets acquired after announcement and first used or installed by 30 June 2021.
Example 3 — Middle-sized business benefits from the BBI
J Construction Solutions Pty Ltd has an aggregated annual turnover of $200 million for the 2020-21 income year. On 1 July 2020, J Construction Solutions Pty Ltd installs a $1 million truck mounted concrete pump for use in the business.
Under existing tax arrangements, J Construction Solutions Pty Ltd could claim 30 per cent depreciation in the first year (based on the asset’s effective life of 6⅔ years).
Under the new BBI, J Construction Solutions Pty Ltd can claim a depreciation deduction of $650,000 in the 2020-21 income year. This consists of 50 per cent of the concrete pump’s value under the new BBI ($500,000) plus 30 per cent of the remaining $500,000 under existing depreciation rules ($150,000). This is $350,000 more than under existing tax arrangements.
At the company tax rate of 30 per cent, J Construction Solutions Pty Ltd will pay $105,000 less tax in the 2020-21 income year (30 per cent of $350,000). This extra tax benefit is worth $14,000 to J Construction Pty Ltd over the asset’s life (at an interest rate of 5 per cent). This will improve J Construction Solutions Pty Ltd’s cash flow and lower the after tax cost of the concrete pump to the business.
Example 4 — Small business benefits from the BBI
Joan and Bruce own a company, NC Transport Solutions Pty Ltd, through which they operate a haulage business on the North Coast of New South Wales.
NC Transport Solutions Pty Ltd has an aggregated annual turnover of $8 million for the 2019-20 income year. On 1 May 2020, Joan and Bruce purchase a new truck for $260,000, exclusive of GST, for use in their business.
Under existing tax arrangements, NC Transport Solutions Pty Ltd would depreciate the truck using their small business simplified depreciation pool. Under the pooling rules, NC Transport Solutions Pty Ltd 4 would deduct 15 per cent of the asset’s value upon entry to the pool, leading to a tax deduction of $39,000 for the 2019-20 income year.
Under the new BBI, NC Transport Solutions Pty Ltd would instead claim an up-front deduction of 50 per cent of the truck’s value ($130,000) before placing the asset in their small business simplified depreciation pool. Joan and Bruce would then claim a further 15 per cent deduction on the depreciated value of the truck ($19,500). As a result of the two deductions, Joan and Bruce are able to claim a deduction totaling $149,500 in the 2019-20 income year, $110,500 more than under existing arrangements. At the company tax rate of 27.5 per cent, Joan and Bruce will pay $30,387.50 less tax in the 2019-20 income year.
This will improve NC Transport Solutions Pty Ltd’s cash flow and help Joan and Bruce’s business withstand and recover from the economic impact of the Coronavirus.
Further Information from the Australian Government
For more information on the Australian Government’s Economic Response to Coronavirus visit: http://treasury.gov.au/coronavirus
Businesses can visit http://business.gov.au to find out more about how the economic response complements the range of support available to small and medium businesses.
Further information or support from OnVenture
Need our help to understand the stimulus packages and how they’ll effect your business, book in a chat here: https://calendly.com/onventure/discovery30min
Information Sourced from
Institute of Public Accountants “Boosting Cash Flow For Employers”: https://www.publicaccountants.org.au/news-advocacy/covid19stimuluspackage/boosting-cash-flow-for-employers