How a Sole Trader Can Benefit from the Budget’s New $20,000 Claim Ceiling

Information verified correct on December 4th, 2016

The latest budget includes a dramatic change to the full claim threshold for small businesses with an aggregated turnover of less than $2,000,000, raising the ceiling from $1,000 to $20,000. But what does that actually mean?

To understand the huge benefits of the new threshold to your business, you first need to understand what came before it. Prior to the budget announcement, any purchase made over the $1,000 mark could not be claimed in its entirety. Instead, under the small business entitlements and general small business depreciation pool, you could claim 15% of it in the first year, and then 30% of the remaining balance each consecutive year until the balance is effectively "written off" over eight years.

The 'saving' this would (and still) gives a sole trader in terms of your business’ taxable income is relative to the tax bracket in which your income sits. Those brackets for a sole trader are;

Taxable incomeTax on this income
0 – $18,200Nil
$18,201 – $37,00019c for each $1 over $18,200
$37,001 – $80,000$3,572 plus 32.5c for each $1 over $37,000
$80,001 – $180,000$17,547 plus 37c for each $1 over $80,000
$180,001 and over$54,547 plus 45c for each $1 over $180,000

So, effectively any purchase that has a cost base less than $1,000 (or could not be itemised in portions below the $1,000 threshold) would only show a tax benefit to the small business in small increments over many years as the “asset” depreciated in value.

A practical example

For the course of this demonstration, we will assume that a small business or sole trader is registered for GST and has brought a car that is 100% designated as a work vehicle and cost $20,000 including GST. This will hold true for any work-related product less than $20,000 - not just a vehicle. Given these assumptions, let’s take a look at the depreciation system, which used to apply to products between $1,000 and $20,000, and will continue to apply to purchases over $20,000.

Note: Included in the above tax percentages is the Medicare Levy. The threshold at which you are charged the additional 2% of this levy varies based on a number of elements, including whether you are a pensioner and your total family income. As a base rule, anyone earning less than $20,452 is exempt, and anyone earning over $24,167 is likely to pay the full 2%. For the basis of the below examples, we will assume you are paying the full 2%, which is highly likely for the majority of small business owners.

Remaining UnclaimedTax Bracket 1 SavingTax Bracket 2 SavingTax Bracket 3 SavingTax Bracket 4 Saving
0.210.3450.390.47
Full Cost of Product$20,000.00
Percentage Claimed for Work100.00%
Full Cost Claimable$20,000.00
Claim After GST$18,181.82
GST Returned$1,818.18

Registered for GST Data

Registered for GSTRemaining UnclaimedTax Bracket 1 SavingTax Bracket 2 SavingTax Bracket 3 SavingTax Bracket 4 Saving
Year 1 Claimable Amount$2,727.27$15,454.55$572.73$940.91$1,063.64$1,281.82
Year 2 Claimable Amount$4,636.36$10,818.18$973.64$1,599.55$1,808.18$2,179.09
Year 3 Claimable Amount$3,245.45$7,572.73$681.55$1,119.68$1,265.73$1,525.36
Year 4 Claimable Amount$2,271.82$5,300.91$477.08$783.78$886.01$1,067.75
Year 5 Claimable Amount$1,590.27$3,710.64$333.96$548.64$620.21$747.43
Year 6 Claimable Amount$1,113.19$2,597.45$233.77$384.05$434.14$523.20
Year 7 Claimable Amount$779.23$1,818.21$163.64$268.84$303.90$366.24
Year 8 Claimable Amount$545.46$1,272.75$114.55$188.18$212.73$256.37
Remaining Amount Written Off$1,272.75$267.28$439.10$496.37$598.19

Not Registered for GST Data

Not Registered for GSTRemaining UnclaimedTax Bracket 1 SavingTax Bracket 2 SavingTax Bracket 3 SavingTax Bracket 4 Saving
Year 1 Claimable Amount$3,000.00$17,000.00$630.00$1,035.00$1,170.00$1,410.00
Year 2 Claimable Amount$5,100.00$11,900.00$1,071.00$1,759.50$1,989.00$2,397.00
Year 3 Claimable Amount$3,570.00$8,330.00$749.70$1,231.65$1,392.30$1,677.90
Year 4 Claimable Amount$2,499.00$5,831.00$524.79$862.16$974.61$1,174.53
Year 5 Claimable Amount$1,749.30$4,081.70$367.35$603.51$682.23$822.17
Year 6 Claimable Amount$1,224.51$2,857.19$257.15$422.46$477.56$575.52
Year 7 Claimable Amount$857.16$2,000.03$180.00$295.72$334.29$402.86
Year 8 Claimable Amount$600.01$1,400.02$126.00$207.00$234.00$282.00
Remaining Amount Written Off$420.01$88.20$144.90$163.80$197.40
Summary of SavingsTax Bracket 1 SavingTax Bracket 2 SavingTax Bracket 3 SavingTax Bracket 4 Saving
Saving Over Time - Registered for GST$5,636.36$8,090.91$8,909.09$10,363.64
Saving Over Time- Not Registered for GST$3,994.20$6,561.89$7,417.79$8,939.39
Effective Cost of Product After Eight Years - Registered for GST$14,363.64$11,909.09$11,090.91$9,636.36
Effective Cost of Product After Eight Years - Not Registered for GST$16,005.80$13,438.11$12,582.21$11,060.61

Note: Effective Cost of Product = Full Cost of Product - Money Returned in Tax Return

The tax benefit under the new budget

From now through to June 30 2017, any purchase with a cost base up to $20,000 can be claimed in full in that first year. And if that means you buy the product on June 30, and it is installed and ready for use, it means you can start seeing that benefit from right now. Plus, if you are registered for GST, it actually gives you the opportunity to buy any product that includes GST up to the value of $22,000, under the assumption it is being 100% claimed for work purposes. This is because you will get the GST back in full, leaving the claimable amount at the $20,000 threshold. But we’ll operate at a figure of $20,000 in the following example.

So let’s take a look at what that means for the same purchase in the new world;

Tax Bracket 1 SavingTax Bracket 2 SavingTax Bracket 3 SavingTax Bracket 4 Saving
0.2100.3450.390.47
Full Cost of Product$20,000.00
Percentage Claimed for Work100.00%
Full Cost Claimable$20,000.00
Claim After GST$18,181.82
GST Returned if Registered for GST$1,818.18
Year 1 Claimable Amount - Not Registered for GST$20,000.00$4,200.00$6,900.00$7,800.00$9,400.00
Year 1 Claimable Amount - Registered for GST$18,181.82$3,818.18$6,272.73$7,090.91$8,545.45
Summary of Savings
Effective Cost of Car - Not Registered for GST$15,800.00$13,100.00$12,200.00$10,600.00
Effective Cost of Car - Registered for GST$14,363.64$11,909.09$11,090.91$9,636.36
Actual Savings Discount - Registered for GST30.09%43.59%48.09%56.09%

As you can see, the benefit is dramatic and instant. Please note, the benefit is relative to the percentage at which you claim the product for work. For example, if you were to use the product 60% of the time for work, you can only claim 60% of it.

Please note; The new system does not mean you can buy a product for $30,000 that has 60% work use, and then claim the full and then claim the full $18,000 (as in 60% of $30,000) under the new system. The "cost base" needs to be under $20,000 prior to any work percentage implications.

Beware

Once you buy a product and claim it, you stand the chance of making a profit from the sale of that item. For example, in the above situation, if a small business fell into Tax Bracket 4 and claimed $20,000 on a work car, the effective cost base of that asset after the first-year tax claim would be $0. If you then sold the car for $14,000 in the second-year (or any future year), that would be considered an income. So you would need to add the difference - in this case $14,000 - to your taxable income in the year in which the car was sold. Obviously, if you claiming a percentage of the product, that percentage needs to be carried through all of these calculations. If you were to claim 60% of a 20,000 product, then your claimable amount written off is $12,000 - so the effective cost base of the product is now $8,000 - and if you sold the product for $14,000, then 60% of that $6,000 margin would need to be considered an income.

What is the benefit of making a business purchase before June 30?

If, like many sole traders and small businesses, you pay your tax as you go (PAYG), then taking control of your taxable income can offer you benefits beyond a simple saving in cash. Each quarter the Australian Tax Office will send you a BAS statement, in which it will request a certain amount of tax. That figure is estimated from your previous year’s actual assessment (so as of July 1, 2015, it would be estimated from the tax year ending June 30, 2014), and done so under the assumption that your income will grow and you will earn more money than you did the previous year.

Since making a large purchase such as a new work Ute prior to June 30 will lower your taxable income by up to $20,000, it will also change the amount owed on your BAS statement each quarter for the following twelve months. That could equate to a couple of thousand dollars worth of cash in your pocket that you otherwise would not have had; and this cash can be used for investment, or it will be gaining you interest or – if you're a sole trader and have an offset account on your Home Loan – saving you on mortgage repayments.

With this in mind, if you are looking to make a number of key work purchases before June 30 and the accumulated amount is going to see your taxable income drop below what it was in the previous year, you’d be wise to complete your tax in early July. You are likely to be owed money back from the Australian Tax Office for starters, plus you will want it to set your new “estimated income” at the lower rate before your next BAS statement is due.

What if my purchase is over $20,000?

Many legitimate work purchases will set you back more than $20,000, and these too can be claimed, however they will be governed by the depreciation system detailed above and you will not get the full amount back. With this in mind, know you will only get 15% of any single product (as in, a product not able to be itemised in independent work-related units less than $20,000 each) back in that first year. This creates an interesting dilemma for small businesses, as the relative value of a figure over time means that money returned to you now is worth more than it will be in eight years.

As such, you may want to consider down-sizing to a product under $20,000. Or even getting two separate products that will do the job, instead of a "set" product that does the whole job, but costs more than $20,000.

Note: If you claim a percentage of something that has on-going costs, then that percentage will carry through to all claims made on that product. For example, if you claimed 80% of a car, you can also only claim 80% of your petrol costs, car insurance, car services, etc. moving forward.

What if things are itemised?

If the cost of products on your invoice are itemised, then it is not the total cost you need to be concerned about, but the cost of the individual components that are claimable. For example, if you were to buy a work Ute and it was $24,000, yet the base car was $20,000, and then there was $4,000 in accessories – such as a $1,000 towbar, a $2,000 lockable tool chest and $1,000 in window tint – that are itemised on your receipt, then you can claim the full $24,000. This is because you are actually going to make four claims, neither of which as an individual claim exceeds the $20,000 limit.

Beware

You cannot claim an item bought for a business that is not making an income; which means set-up costs are exempt. So before you buy any big ticket items, set your business up and functioning at a minimal cost. Once an income is acquired, you can then purchase bigger ticket business items. However, you'll want those purchases to have an immediate impact on your income because of the "non-commercial losses" provision for sole traders - this in essence means if the write off creates a loss it may not be deductible in certain circumstances. For example, if your turnover is less than $20,000 and you claim a $20,000 product.

Chris Stead

Chris Stead is an award winning content creation and design specialist that dabbles in all subjects, but is best known for his work in technology, entertainment and gaming. When not writing, he can be found among the waves of the Northern Beaches.

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4 Responses to How a Sole Trader Can Benefit from the Budget’s New $20,000 Claim Ceiling

  1. Default Gravatar
    Jona | May 12, 2016

    I am a practice nurse in a medical Centre WHO I facilitate students recently uni students in the last year I was informed I Will be paid as clinical payment guidelines as I standoff as the facilitate for the students .i invoice my Services using the ABn if my employer. Should I apply for my own ABn .. But u am employed And working as I facilitate And am I able to chase from 2012 ,2013and 2014 students That I was Not paid for.

    • Staff
      Shirley | May 12, 2016

      Hi Jona,

      Thanks for your question.

      ABNs are designed for those who intend to start their own business. Since you already have an employer, you may not need one.

      Please get in touch with the Australian Tax Office in regard to your situation to discuss your options.

  2. Default Gravatar
    Melinfa | July 9, 2015

    So I run a private bnb out of my own home – just started Feb 2015.
    I make approx $400-600 per week….seasonal.
    If I wanted to buy a new mattress for bnb room would I buy the Best?
    *or still be very frugal with $$$

    • Staff
      Shirley | July 9, 2015

      Hi Melinfa,

      Thanks for your question.

      This decision is completely up to you. However, if you’re looking for the most tax effective strategy regarding your property then it’s best to speak to a certified accountant or depreciation specialist.

      Assuming that this property is your main residence, you may not be eligible to claim deductions depending on your situation.

      Cheers,
      Shirley

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