Information verified correct on January 20th, 2017
Want to pay half price for your next work vehicle?
Small business owners across Australia have reason to celebrate, given a significant increase in what they can claim in the form of tax deductions. If you, as a small business owner, have been considering buying a new or used car, now is a good time to put your plans into action, all thanks to a recent announcement through the Federal Budget.
The benefits aren't limited to just buying a car – you can also claim tax breaks on various other business-related purchases as long as they don’t exceed the newly prescribed threshold.
As a small business owner you can definitely benefit by going through what follows.
What is the Small Business Tax Break?
As part of a 2015 Federal Budget ruling, small business owners can now claim tax breaks on purchases up to $20,000. The previous asset threshold stood only at $1,000.
This ruling applies to businesses with annual turnovers of less than two million dollars and they can claim tax deductions on any number of sub-$20,000 purchases they make from the legislative passing of the law to June 30, 2017.
An allocation of $1.75 billion has come from the Federal Government to fund this scheme, which will be in place for two years.
Are you in a small business? Here’s how the tax break works.
Understanding the nitty-gritty of how this tax break works can only help, so here’s what you need to know as a small business owner.
Apart from having a turnover of less than two million dollars, your business should be able to demonstrate activity through quarterly business activity statements and it should be trading actively.
Purchases of less than $20,000 now become instantly tax deductible, meaning you don’t have to claim these purchases as deductions over a span of several years.
Some of the purchases that qualify for this tax break include equipment, machinery, furniture, tools, vehicles, and just about any asset involved in running your business.
Non-deductible items include plants, inventory/stock, and in-house developed software
While purchases that exceed this threshold don’t qualify for instant write-offs, you can still expect to write them off over a prolonged period. You allocate assets more than $20,000 in value together to a General Small Business Pool and work on their depreciation at the same rate.
For the first year, depreciation is 15%, and it becomes 30% in the following years. If, by before 30 June 2017, the value of this pool falls under $20,000, you can look forward to its immediate deduction as well.
So, how do you pay $10,000 for a $20,000 car?
While businesses can consider buying used vehicles, know that you can even get a micro car, a light car, an entry-level small car, or a base grade van for less than $20,000. It should be expected that car dealerships will give you plenty of opportunities to take full advantage of the tax break by offering car deals for less than $20,000. What also helps is that this tax break applies even if you plan to buy a car using finance.
Over time, if you make your claims in the right way, you can actually end up saving around half of the car’s cost in the form of taxes. Here’s what you can do to claim back as much as $10,000 on a $20,000 purchase. Please note that for a sole trader or a partnership a log book is required, for a company or a trust a Fringe Benefit may arise.
You can only claim a maximum of 5,000 kilometers in one year
If you purchase the car you can claim the expenses incurred in running the car to the extent of business use
In time, the vehicle depreciates in value and you can claim this cost annually as part of the car's expenses
You can claim the cost of insurance, loan interest, fuel, servicing, and repairs as operating costs
If you’re leasing a vehicle, you can deduct the lease payments from your business’ taxable income. Again, if you lease the car you are not purchasing it until the final payment – the least cost forms part of the running expenses. This is not to be confused with a 'Hire Purchase' arrangement where you buy the car and can claim interest on the loan as part of the running costs.
You don’t have to use this tax break just to buy a vehicle, and you can make use of it in various other ways.
If you own a restaurant you can buy new furniture, kitchen equipment, and even uniforms for your staff – keep in mind that you can claim uniforms elsewhere depending on certain conditions
As a tradesperson, you can think about buying new tools or even a computer
Small scale industries can consider buying machinery
This tax break is not the only piece of good news for small business owners. Incorporated businesses with turnovers of less than two million dollars now pay a lower tax rate of 28.5%, as opposed to 30%. If you run an unincorporated business like a partnership or as a sole trade you stand to get a 5% discount from July 1, 2015, not exceeding $1,000 per year.
If you qualify for the tax break, now could be the perfect time to buy a car for your business.
DISCLAIMER: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information applicability to their own particular circumstances.
There's a range of options available for you to finance purchases for your small business, so find out how best to pay for assets under $20,000. Even when you use a loan you can take advantage of the Small Business Tax Break and claim back your newly purchased asset straightaway.
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