As background to this issue, the purchase of an item of equipment (or any other asset) for use in a business could not be expensed as a tax deduction for the full price of the item. Instead, the asset is included in an asset register and the deduction for its cost is spread over a number of years and it is called depreciation. The years the cost is spread depends on the estimated useful life of the item. For example, a veterinary clinic purchases a $15,000 item of equipment on 1 July. Although the business outlays $15,000 right away, the tax rules prevent a tax deduction for the full $15,000 in the year of purchase. If that particular piece of equipment has useful life of 10 years, the vet clinic would claim a depreciation deduction each year for of $1,500 for 10 years (using a straight-line depreciation rate). This policy had an unfair cash flow impact on small business and it did little to stimulate the economy.
On 12 May 2015, the Federal Government instituted an incentive by allowing small business (with annual sales less than $10 million) to claim an immediate tax deduction for assets costing less than $20,000. To be clear, the incentive doesn’t mean a business gets any cash back from the ATO, it simply allows a business to claim the total purchase outlay at the time it is incurred, and not spread over several years. The immediate deduction reduces taxable income which in turn, reduces the amount of tax payable for that year.
Generally, the deduction applies to physical assets such as plant, equipment, vehicles, computer systems, etc. The deduction only applies to assets used in a business. There is no limit on the number of different assets that can take advantage of the incentive, and it doesn’t matter if the asset is new or used, as long as each item costs less than $20,000. As the up-front write-off is effectively a substitute for depreciation deductions that would have been otherwise claimed, a business can’t “double-dip” with deductions by claiming the immediate write-off and depreciation.
The stimulus measure was initially due to cease on 30 June 2017 and as it proved popular, it was extended for another year to 30 June 2018. We don’t know if the Federal Government will extend or abolish this incentive from 1 July 2018. The Federal Budget in May 2018 will reveal their intent. If the incentive is not extended, the incentive can still be accessed for assets purchased and installed ready for use by 30 June 2018, as a $1,000 write-off limit will apply from 1 July 2018.