What you need to know about the federal budget's proposed $20,000 small business deduction

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This is a guest post by Scott Grady, partner at CNS Partners. Scott's main areas of expertise are strategic tax planning, business structuring and general taxation consultation.

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financial growth

The government is going to give me $20,000 to put towards buying assets for my business? Too good to be true?? That is because it is just that…. not true. Let me explain.

The Government has proposed to expand accelerated depreciation by allowing small businesses with an aggregated annual turnover of less than $2 million to immediately deduct each asset that cost less than $20,000 (excluding GST). The measure will apply to assets acquired from 7.30pm, 12 May 2015 until 30 June 2017. In simple terms – buy an asset that cost less than $20,000 and you will receive a full deduction for the amount spent in the financial year that the cost was incurred.

This will replace the previous instant asset write-off threshold of $1,000.

Assets that cost $20,000 or more (which can't be immediately deducted under other provisions) can be deducted over time using a small business pool. Under the pooling mechanism a deduction for 15 per cent of the cost is allowed in the first income year with a 30 per cent deduction allowed for each income year thereafter.

The $20,000 immediate deduction is therefore a timing difference in that you can get the full deduction over one year instead of over the assets effective life.

Here are some examples:

Example 1

Oscar runs a small business and buys a new car for his business for $19,000. This is an outright tax deduction in the year of purchase and is deducted off the businesses taxable income.

Example 2

Zac runs a small business and buys a new car for his business for $35,000. The $35,000 asset will be depreciated at 15% in the year of purchase ($5,250 deduction) and 30% each year after that until the $35,000 cost is fully depreciated.

You can see from the above that overall both business owners get a full tax deduction for the asset purchased but in example 2 it is over a few years instead of one.

The bottom line for me as an adviser is this – if you need new assets to help generate larger profits for your business then buy them and take advantage of the $20,000 accelerated depreciation. If you are purchasing just to save tax, you are wasting your money.

Lastly, it is important to remember that the above is a budget proposal and, as yet, is not legislation. Only time will tell as to whether it makes it through parliament. My personal opinion is that this will become legislation but if it does not then unfortunately there will be no accelerated deduction available. This makes my point in the previous paragraph even more important - that is, don’t purchase for the tax deduction – purchase if the asset will add value to your business operations.

This post also appears on the CNS Partners Blog.

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Scott Grady CNS PartnersScott Grady

Scott became a partner at CNS Partners in January 2010 after gaining management experience in large Brisbane accounting firms. His previous positions enabled him to appreciate the diverse roles that can be fulfilled by an accountant, from a large corporate environment to the more intimate service required from a suburban adviser.  Time spent working for a large Government entity in London enhanced Scott's perspective of business conduct and prepared him well for relating to clients with a broad spectrum of personalities and requirements.  Scott has a Bachelor of Commerce from the University of Queensland, a Graduate Diploma of Chartered Accounting (CA), is a registered tax agent and holds a public practice certificate.  His main areas of expertise are strategic tax planning, business structuring and general taxation consultation.

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When not looking at ways to use technology to create a competitive advantage for his clients and build better businesses, Ben is a husband, busy father of boys, avid gardener, and keen runner and cyclist.

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