The $20,000 instant asset write-off is Australia’s most popular tax initiative, considering that 96 per cent of business leaders have voiced support for continuing it beyond its projected expiration date of June 30, 2019. In light of this, it’s particularly surprising that a national survey by H&R Block and Officeworks found that 85 percent of respondents had never used it. Worse, 58 per cent had never even heard of the scheme.
Of businesses who were aware of the measure, many are more focused on running their day-to-day business than taking the time to jump through the bureaucratic hoops needed to benefit from a tax break. The write-off, however, represents a significant competitive advantage for small businesses, and shouldn’t be ignored.
How the asset write-off works
Traditionally, businesses can write off the lost value of depreciating assets over time. The rate at which they depreciate, and the amount that businesses can write off, depends on the specific type of asset and the business’ tax rate. This is a very helpful tax break to growing businesses as it is, but still leaves them to shoulder much of the cost burden in the short term. The instant asset write off transformed this tax break into an active tool to drive small business growth.
The asset write off allows businesses to deduct up to 27.5 per cent of the cost of an asset in the same year that it was purchased, specified by the business’ tax rate. This allows businesses to claim a much larger tax benefit in the year of purchase than they would otherwise be eligible for, freeing up additional funds for other purposes.
Using financing with the instant asset write-off
A major benefit of this tax initiative is the impact of financing on it. A business that has no capital available to invest in growth might instead purchase the assets it needs on credit. At the end of the year, the entrepreneur can then simply claim the $20,000 asset write-off to get an additional windfall in the form of the tax break. In the short term, this provides a significant financial boost to businesses, providing them with additional interest-free capital that they can apply to help realise their vision of a successful business.
Of course, businesses need to use the write-off responsibly. Taking on debt to purchase non-essential assets just to benefit from the tax-write off can be damaging. Purchases that don’t actually benefit the business will cost unnecessary interest, and tie up capital that could be better spent in other ways. Used appropriately, however, it can be used to make a startup much more competitive in a critical phase of its development, setting it up for greater success in the future.
Ignoring the write-off is sacrificing competitiveness
Small business owners who lack financial expertise might see the write-off as a relatively minor benefit, since it only delays a tax benefit that they can still claim over several years’ time. That time, however, is incredibly valuable. Businesses who don’t use the write-off still need to buy assets in order to operate effectively. Many small businesses will also rely on financing to make these purchases, leaving them with the same debt burdens as their competitors. Unlike their savvier competitors, however, they don’t benefit from the same instant tax breaks. As a result, even those who properly depreciate their assets have less capital to reinvest into their business in the short term. For the years that it takes for them to claim the same value in write-offs, they remain at a disadvantage.
While the original investment has to be used to purchase assets, the money saved in taxes can be invested in whatever way entrepreneurs consider best. For many business owners that means raising wages, or funding growth opportunities while their competitors can’t. As a result, they can attract better talent, advertise more effectively, and reach out to broader markets than other businesses can.
Understanding the value of a tax break like the instant asset write-off does little good when more than half of small business owners still aren’t aware of it. Introduced as a temporary measure to stimulate small business activity, the write-off still has a lot of potential to improve a lot of Australian small businesses. While awareness of the measure has grown since it was initially introduced in 2012, it still has a long way to go. Because of this, many business and government leaders are pushing for a permanent instant asset write-off, potentially with an even higher threshold of up to $40,000.
Businesses need all the financial support they can get, especially early on during the startup phase. By understanding the purpose of the instant asset write-off, and making use of it, businesses can ensure their survival in the short term, and their ability to grow and compete in the longer term.