Guest post by Rob Chaloner, Founder and Managing Director of Stratton. Rob is passionate about developing smarter ways to buy and finance cars. With stratton, he's working to help Australian buyers disrupt the traditional car buying, financing, and insurance markets through smarter products and online services.
New and early stage startups are the types of businesses that are likely to benefit from the improved, simplified depreciation rules for small businesses that now include asset purchases up to $20,000. Announced as a defining feature of May’s Federal budget, this substantial increase to the existing business depreciation rules aims to boost small businesses in Australia. While a $20,000 tax break may sound enticing, what does this actually mean for your business? Here’s what you need to know:
In previous years, accelerated depreciation was available to small businesses with an asset limit of $1,000. The Federal Government has now lifted the limit to $20,000 in an effort to improve business confidence and growth.
Accelerated, or simplified depreciation allows qualified businesses, including startups, to potentially claim the total purchase price of assets in the year they are purchased, as opposed to normal depreciation rules, which spread the claim out over a number of years.
Let’s look at an example: Startup XYZ qualifies for this scheme and purchases a commercial vehicle, solely for business use, for $15,000. In their tax return, Startup XYZ can claim $15,000 as an immediate deduction on their total taxable income. In principle, this will reduce the amount of the tax that Startup XYZ is then required to pay.
Any assets within the program criteria that were purchased after 7:30 p.m. on the night of the budget announcement, 12 May 2015, and up until 30 June 2017, are eligible.
How relevant is this change for startups?
While the increase in accelerated depreciation will assist certain startups, those that are not yet turning over a profit or generating a taxable income are unlikely to benefit from these simplified depreciation rules. Furthermore, it is not possible to carry an accelerated depreciation amount forward into future years.
Does my startup qualify?
Many startups, especially those in the new and early stages, will be eligible to benefit from this improved accelerated depreciation, as it is restricted to businesses with an annual aggregated turnover of up to $2 million.
Whether operating as a company, trust, partnership or sole trader, your startup must also be a registered with the Australian Securities and Investments Commission (ASIC). This involves applying for an Australian Business Number (ABN), registering your business name and paying the applicable fees.
What assets are included in this scheme?
Most assets, both new and old, purchased by a startup for under $20,000 and for exclusive business use are likely to be within the guidelines and should be eligible for accelerated depreciation. This includes vital assets for many startups, including office furnishings, computers, and off-the-shelf software.
The main restrictions are horticultural plants, capital works, and assets already allocated to a low-value or software development pool. The cost of developing software that will only be used by your startup, where it totals less than $20,000, is eligible for accelerated depreciation, unless you have previously claimed deductions under the software development pool rules.
What about assets that cost more than $20,000?
Assets that are purchased for more than $20,000 do not qualify for accelerated depreciation. Furthermore, you cannot claim the portion under $20,000, with the total purchase amount instead being subject to the normal depreciation rules. The key difference for assets above the $20,000 threshold is, instead of being claimed in one financial year, the depreciation deductions are claimed over a number of years.
It’s also important to note if your business is not registered for GST, the $20,000 threshold for this scheme will be calculated as a GST-inclusive amount.
How many times can this $20,000 depreciation be claimed?
There are no restrictions on how many assets under $20,000 or how many times accelerated depreciation can be claimed—even within the same financial year. For example, if your business purchases two commercial vehicles each valued at $15,000 within the same financial year, as long as your startup and the assets qualify, the total value of $30,000 can possibly act as a deduction on your taxable income.
Can I take out a loan to purchase assets?
While your startup may not have the cash available to purchase assets, you can take out a business loan and still qualify for accelerated depreciation. On the other hand, while leasing of assets—especially commercial vehicles—is common practice for many businesses, it is important to be aware that any leased assets are not eligible for this scheme.
Is there anything else I should know?
As always, discuss with your accountant or financial advisor to ensure that purchasing assets and claiming this accelerated depreciation is in the best interest for your startup.
Visit stratton.com.au for more information on business loans.