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The Treasury and the real world – Instant asset write-off stuff up

We all know that on budget night we got an instant asset write off – for most of our clients with aggregated turnovers under $50 million, new and second hand assets of any value can be immediately written off (between $50 million and $5 billion only can write off new assets).

But we quickly realised an instant write off can be a curse and not a blessing.

Ken starts his business (sole trader) in May 2021 and buys a widget machine for $20,000 which has an effective life of 10 years. His business earns $10,000 a month. 

With no instant asset write off he would have $20,000 income in year 1 and $120,000 in each year after and would claim $333 depreciation in the first year and $2,000 in the subsequent years – most of the depreciation will occur in years when Ken has lots of tax payable.

With an instant asset write of the income in the first year would be $20,000 and the depreciation would be $20,000 giving no taxable income, but as $18,200 of the income was already tax free the depreciation had had not real tax effect at all.

But until recently we could not opt out of an instant asset write off. But that changed late last year when the Government passed a Bill that claimed that it:

“allows entities to opt out of temporary full expensing and the backing business investment incentives on an asset-by-asset basis.”

EM to Treasury Laws Amendment (2020 Measures No. 6) Bill 2020

The problem is, for most taxpayer who would want to opt out of the instant asset write-off, it just does not work.

Most small businesses don’t claim depreciation under Division 40, but rather claim depreciation under Subdivision 328-D, being where the small business depreciation rules are. We know these rules well as they create a small business pool and, most importantly state that if the pool balance on 30 June is less than the instant asset write-off threshold, we can write off the entire pool. To be technical:

  • Under section 328-210 ITAA97 we write off the balance of the general small business pool if that amount is less than $1,000 but more than zero. 
  • Under subsection 328-181(5), section 328-210 of the Income Tax Assessment Act 1997 applies as if the words ” less than $1,000 but ” in subsection (1) were disregarded, up to 30 June 2022.

The Act that claims it allows an entity to opt out of the instant asset write off (Treasury Laws Amendment (2020 Measures No. 6) Act 2020) makes changes to Division 40 but make no changes to Subdivision 328-D (other than fixing a heading). 

It does look like the Treasury are not aware that small businesses generally claim depreciation, and the instant asset write-off, through Subdivision 328-D (the small business pool) and not through Division 40.

I can’t see how the changes in the Act passed in December can allow a small business to opt out of writing off their small business pool balance under 328-210… meaning our poor sole traders clients, those most likely to want to opt out, can’t opt out of instant asset write-off the balance of their small business pool.

Our Treasurer proudly stated in a Media Release on 10 December that “Businesses can also now opt out of temporary full expensing and the backing business investment incentive on an asset‑by‑asset basis.” 

Maybe Treasury should have another go at implementing the instruction of their Minister. 

And yes, I have raised this with the Government and the various lobbying organisations and I am sure it will get fixed.

By Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.

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