Planning on buying equipment? 

If you plan to purchase a depreciating asset (e.g. computers, machinery, cars), here’s what you can claim before 30 June.

On 1 July 2002 the Australian Taxation Office (ATO) introduced new depreciation rules. The changes significantly increased the amount a business can claim as a tax deduction in the year they purchase the asset.

Do the rules apply to me?

To qualify for these new rules you must be a “small” business according to the ATO. That means:

  • You need to have a business trading as a sole trader, partnership, trust or company. (These don’t apply to individuals or investors.)
  • The business turnover, including all entities in your group, must be less than $2 million (excluding GST)

Assuming you qualify, these rules are for you.

What is a depreciating asset?

A depreciating asset has a limited effective life and can reasonably be expected to decline in value over the time it’s used. Examples of depreciating assets include, computers, electrical tools, furnishings and motor vehicles.

The cost of an asset includes both the amount you pay for it and any additional amounts you spend on transporting and installing it. It also includes amounts you spend on improving the asset.

Assets under $6,500

If the asset costs less than $6,500 it can be written off in the year of purchase.

The $6,500 threshold applies on an asset-by-asset basis, so you can claim the immediate deduction on more than one asset.

As an example, let’s say you want to purchase four work computers this financial year in one transaction. Each one costs $3,000 excluding GST, making a total of $12,000 excluding GST.

As each computer costs less than $6,500, they can be written off immediately. So the total deduction you can claim in the year of purchase is $12,000.

Assets more than $6,500, but not including Motor Vehicles

If the assets costs more than $6,500 then you can claim 15% of the value in the first year and 30% of the value each year after.

For example, if you purchase a new piece of equipment on 25 June 2012 for $10,000 excluding GST, you can claim a $1,500 tax deduction in the year of purchase.

Motor vehicles (both new and second hand)

For a motor vehicle you can claim a deduction for the first $5,000 of its cost, and the balance is depreciated at 15% in the first year.

Let’s say you purchase a dual-cab ute for $40,000 excluding GST. The amount you can claim is calculated as follows:

 

Cost $35,000
Less: initial deduuction   $5,000
Balance $30,000
Depreciation 1st Year at 15%   $4,500

 

Total deduction in the first year    $9,500  ($5,000 + $4,500) 

Remember that motor vehicle depreciation is limited to the luxury car limit ($57,466 for the 2012/13 year).

Remember: cashflow is the life of your business

Before you go out and buy everything you’d like, it’s important to look at the cash flow of the business.

A tax deduction will only reduce your taxation by your marginal rate of tax. A company’s rate of tax is 30%, so a tax deduction of $5,000 will only reduce your taxation by $1,500. It will still cost you $3,500.

Do you have enough cash, both now and into the future? If not, you may need to finance the purchase.

Never purchase an asset simply for the tax benefit. Only buy an asset when you need it to help run the business, generate more income or make the business more efficient.

If you have any questions, please don’t hesitate to contact us.

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