Money Hack: Use the small business tax break while you can
You won't want to miss out on this chance to claim more on your business expenses.
If you run a business with an annual turnover of less than $2 million, you're eligible for this tax break. It began on 12 May 2015, but ends on 30 June 2017, so make sure you get in there while you can. To avoid FOMO, this money hack explains how the tax break works and how you can use it to your advantage.
What you first need to know
This tax break is all about letting you claim more on deductible business expenses.
- You have to pay tax based on how much you make. The more you make, the more tax you pay.
- Tax deductions let you lower the amount of tax you have to pay. They do this by making it look like you earn less "on paper".
Consider someone who makes $100,000 a year. Then imagine that they apply a $20,000 tax deduction. Now they still make $100,000 a year, but only have to pay as much tax as someone who makes $80,000 a year.
There are rules about what exactly you can claim as a deduction. The golden rule is: if you need it to earn your income, then you can claim the amount you paid for it as a tax deduction. However, there are also a lot of other rules about how much you can claim and exactly what qualifies.
To understand why this tax break is such a big deal, it helps to understand exactly how deductions can help you save money and what tax thresholds are. See below for an explanation and then read on to find out how this tax break works.
How the small business tax break works
This small business tax break is all about temporarily loosening those rules, specifically for "depreciating assets". The rules were relaxed in 2015 but will be tightened up again on 30 June 2017.
- What are depreciating assets? This refers to business items that lose value over time. Overall, this probably refers to most things you might buy for your business, such as computers, vehicles, tools and other equipment.
Thanks to the more relaxed rules, you might be able to claim much more in tax deductions.
There are two ways you can claim a purchase as a tax deduction and you can apply for either one of these depending on how much you paid for it. The two methods are known as "instant write-offs" and "simplified depreciation":
- Instant write-offs. Use this if you paid less than $20,000 for something.
- Simplified depreciation. Use this if you paid more than $20,000 for something.
How do "instant write-offs" work?
One of the tax deduction rules is that you can't always claim the full cost of something all at once. Instead, you can only claim a small fraction of the amount you paid each year.
Back in 2015, the rule was that anything over $1,000 could only be claimed a little bit at a time, over the course of several years. From 2015-2017, however, you can claim purchases of $20,000 or less all at once. In other words, you can instantly write off things worth up to $20,000.
How does simplified depreciation work?
By choosing to opt-in to this rule, you can now put your depreciating business assets that cost $20,000 or more into one big bundle known as your "business asset pool" and claim deductions for the pool all at once. There are three stages to these deductions over time:
- The first year. You can claim 15% of the pool's value as a deduction.
- The second year onwards. You can claim 30% of the pool's remaining value as a tax deduction. This continues until the total value of the pool drops below the instant write-off threshold.
- After the pool's value drops below the instant write-off threshold. In 2015 to 2017, this threshold is $20,000, but from 1 July 2017, it might revert to $1,000. After it reaches this point, it can all be written off at the same time as a tax deduction.
This timeline starts from when you choose to start using simplified depreciation. The easiest way to keep track of your business asset pool will generally be to keep track of it individually. See the example below for an idea of how it works.
Three other rules you need to know about
Before you can start claiming, there are a few other key rules to remember. These rules are essential because they can help to determine how much something is "actually worth" and whether you can instantly write it off or if you'll have to add it to your business pool.
1. Business and personal use items
You can only claim the portion of an item that you use for "business purposes" as a tax deduction. For example, if you use a car for 50% business and 50% personal use, then the tax deductible amount is only 50% of the purchase price.
The total value of an item, regardless of its business or personal use proportion, determines which set of rules you use. However, the proportion of business to personal use will determine the amount you can claim as a tax deduction.
To use the above example:
- Instant write-off asset deductions. Let's say the car is worth $18,000. Only $9,000 will be claimable as an instant write-off tax deduction because it's only used for business purposes half of the time.
- Simplified depreciation asset deductions. Now let's say it's a $22,000 car. This means you can't use instant write-off deductions. Instead, you can add it to your business asset pool. However, you can still only claim 50% of its value ($11,000) as a deduction.
The above example is only meant to show you how it works and isn't entirely realistic because it doesn't include GST.
2. GST paid for business items
Is your business registered for GST? You must consider the following before getting started:
- Businesses that make more than $75,000 per year must register for GST.
- Businesses that make less than $75,000 per year may choose to register for GST, but don't have to.
Generally, if you're receiving Business Activity Statements from the tax office then you're probably registered for GST.
- If registered: GST is not included in the cost of an asset.
- If not registered: GST is included in the cost of an asset.
This applies when determining which set of rules you use, as well as how much you can deduct.
3. Conditions apply
There are some specific items that do not qualify for an instant write-off and cannot necessarily be added to a business pool as usual. These will often have their own special deduction rules.
Also, the total value of an individual item includes the money spent upgrading it, delivering it and installing it. This might push the value of something over $20,000, at which point it might have to be added to your business asset pool instead of being claimed as an instant write-off.
Lastly, it's important to remember that this is not a comprehensive guide to all tax rules that may be applicable. You should look into your own personal situation and seek the assistance of a qualified tax accountant if needed.
For essentials that you're likely to need within the next 12 months or two years, like a trailer that's on its last legs or machinery that might give out soon, you might find it considerably more cost-effective to jump ahead and replace them before 30 June instead of waiting. Especially if you can claim these items as instant write-offs.
You can also claim business loan repayments as a tax deduction to save a bit more, although these naturally don't qualify as depreciating assets.
Generally, right now is a good time to make big ticket business purchases, as well as stocking up on smaller items to claim as instant write-offs.
DISCLAIMER: This article is general advice. It does not consider your own personal circumstances and may not be applicable to you. You should obtain professional advice and consider your own situation before acting on anything stated in this article.
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