A Guide For Instant Asset Write-Off

One of the most important things that every business owner should keep in mind is how to make the most out of their tax deductions. 

And what better way to start the year than by learning about Instant Asset Write-Off 2024?

Don't worry; we won't bore you with complicated terms and financial jargon!

Instead, we'll break it down for you in an easy way, so you can stay on top of the latest trends and make informed decisions for your business.

If you are looking for assistance with finance for a vehicle or asset before the end of the financial year contact us today!  

Eligible Assets for Instant Asset Write-Off

The instant asset write off (IAWO) is a tax deduction that allows eligible small businesses to immediately write off the business portion cost of purchased assets in the year first used or installed ready for use for business purposes.

The Australian government introduced the IAWO scheme in 2015 with an increased threshold of 20,000, and it has been increased and extended several times. Currently, it is available to eligible businesses until 30 June 2023, just like the low and middle income tax offset.

The scheme is designed to help small businesses invest in assets that can help them grow and improve their productivity. By immediately deducting the cost of these assets, businesses can reduce their taxable income and improve their cash flow.

To be eligible for the IAWO scheme, your business must have an aggregated turnover of less than $500 million. Additionally, the asset must meet the following criteria:

• It must be new or second-hand but unused by anyone else
• It must be purchased and used or installed ready for use
• It must cost less than the threshold for the relevant financial year. The current threshold is $150,000, and it applies to assets purchased and used or installed ready for use. For assets purchased before this period, the threshold is lower. See the table below for more details.
  
  

In summary, the IAWO scheme allows eligible small businesses to immediately write-off the cost of eligible assets purchased and used or installed ready for use for their business purposes.

To be eligible, the asset must meet certain criteria, including being new or second-hand but unused by anyone else, costing less than the threshold for the relevant financial year, and not being one of the excluded assets.

Second-Hand and Existing Assets Eligibility for Instant Asset Write-Off

Second-hand assets can be eligible for the instant asset write-off, provided they meet the eligibility criteria.

The instant asset write-off allows small businesses to claim an immediate deduction for the cost of eligible assets in the year they are purchased rather than depreciating the cost over several years. sole trader instant asset write off is the same as well. 

To be eligible for the instant tax write off 2022, the eligible assets costing must be:

1. -Cost less than the threshold amount: Currently, the threshold amount is $150,000 (up to 30 June 2023).
2. Be used or installed ready for use in the income year you are claiming it.
   
   

Regarding existing assets, if you've already owned an asset and have been using it for personal purposes, you can still claim an instant asset write-off for the portion of the asset's use that is for businesses purposes.

For example, if you have a personal car that you start using for Australian businesses, you can claim the instant asset write-off for the portion of the car's use that is for business purposes.

It's important to note that not all assets are eligible for the instant asset write-off. For example, assets leased to another party or used solely for earning rental income are generally not eligible.

It's always advisable to consult with a tax professional or accountant to determine whether a particular asset is eligible for the instant write off for individuals to ensure that you comply with all relevant tax laws and regulations.

Qualification of Sole Traders and Small Businesses for Instant Asset Write-Off

In Australia, the instant asset write-off scheme allows eligible small businesses and sole traders to immediately deduct the cost of eligible assets, including new and depreciating assets, up to a certain threshold. The threshold varies depending on the financial year and is subject to change.

Under the current rules, eligible businesses can immediately deduct the business portion of the cost of eligible assets that cost less than the relevant threshold amount, which is currently set at $150,000 until 30 June 2023, this means you may not be able to claim the entire cost of the asset.

To be eligible for the instant asset write-off, a business must:

• Have an aggregated annual turnover of less than $500 million (this is based on the combined turnover of all entities that are grouped together for tax purposes)
• Have purchased an eligible asset for business use
• Use the asset or have it installed and ready for use in the income year in which the deduction is being claimed
• Not be using the simplified depreciation rules, which are designed for small businesses with a turnover of less than $10 million.
  
  

It's worth noting that not all assets are eligible for the instant asset write-off. For example, assets that are leased out to others, or assets that are used for private purposes, are not eligible. It's important to check the eligibility of the assets valued before claiming the deduction.

Instant Asset Write-Off Criteria: Installed and Ready for Use

The criteria for claiming an instant asset write-off include having the asset installed and ready for use. It is important to note that the asset must be acquired before the end of the financial year (30 June) in order to claim the instant asset write-off. 

Working Out the Business Portion of Assets for Proper Instant Asset Write-Off Claims

To claim an instant asset write-off, it is important to work out the business portion of the assets accurately. This means determining the percentage of the asset's use for business purposes.

For example, if you purchase a new car for your business but also use it for personal trips, you will need to calculate the percentage of time the car is used for business purposes versus personal use. You can use logbooks, odometer records, or other documentation to determine the business use percentage.

Once you have determined the business use percentage, you can apply it to the cost of the asset to calculate the deductible amount for tax purposes. This will ensure that you are only claiming the instant asset write-off for the business portion of the asset and not for personal use.

Claiming Multiple Assets: Annual Aggregated Turnover Threshold

When claiming an instant asset write-off for multiple assets, it is important to consider the annual aggregated turnover threshold. The annual aggregated turnover is the business's total income, including any business income and any other income earned.

Multiple assets can be claimed under the instant asset write-off scheme for businesses with an annual aggregated turnover of less than $500 million. The cost of each individual asset must be less than the instant asset write-off threshold, which is currently $150,000.

However, if the cost of any individual asset exceeds the instant asset write-off threshold, it cannot be claimed under the instant asset write-off scheme. Instead, it will need to be depreciated over its useful life.

Writing Off Small Business Pool for Depreciation

You can write off your small business pool, which is a way of grouping assets together to make it easier to depreciate them if you have a lot of assets.

When you have multiple assets, you can group them into a pool and claim a deduction for the depreciation of the entire pool rather than individually calculating the depreciation of each asset. This is known as the small business pool.

The pool balance is calculated at the end of each income year, and the deduction for depreciation is based on the pool balance. The depreciation rate for the pool is 15% in the first year and 30% in each subsequent year.

When you dispose of an asset in the pool, you will need to reduce the pool balance by the written-down value of the asset. If the pool balance falls below $1,000, it can be written off in the current income year.

Car Limit for Instant Asset Write-Offs: Luxury Cars, Trucks, and Utes

The car limit is the maximum amount that can be claimed as a tax deduction for cars used in a business. The car limit is determined by the Australian Taxation Office (ATO) and is based on the cost of the car, the date it was first used, and its fuel efficiency.

Luxury cars are subject to a higher car limit, which means that the amount that can be claimed as a tax deduction is lower. The ATO considers a car to be a luxury car if its value exceeds the luxury car threshold, which is currently $84,916 for fuel-efficient vehicles (as of the 2022-2023 financial year).

However, trucks and Utes primarily used for work purposes are exempt from the luxury car limit. This is because they are considered to be tools of trade rather than luxury items. Therefore, they can still be claimed as a tax deduction even if they are expensive.

On the other hand, an expensive car that is not necessary for work purposes cannot be claimed as an Australian income tax benefit, as it is considered to be a personal expense rather than a business expense.

It is important to note that claiming a tax deduction for a personal expense can result in penalties and fines from the ATO and that the current eligible asset costing car limit is $64,741. 

This article hasn't taken into account your individual circumstances, for example outstanding tax statements lodged will be a different situation. It is best to consult a tax accountant before making any decisions with tax. Contact one of our tax accountants!

The information provided on this tax blog is intended for general informational purposes only and should not be considered as professional tax advice. While we strive to ensure the accuracy and currency of the content, tax laws and regulations are subject to change, and individual circumstances may vary. We recommend consulting a qualified tax professional or seeking advice from the Australian Taxation Office (ATO) for personalized guidance tailored to your specific situation. The authors and creators of this blog disclaim any liability for errors, omissions, or inaccuracies in the information provided. Use the information at your own discretion, and always exercise caution when making financial or tax-related decisions.