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Small businesses can now claim the $20,000 instant asset write-off for 2023–24 with certainty.
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Some certainty on the small business instant asset write-off
04 July 2024
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When the government announced as part of the federal budget 2023–24 in May 2023 that it would temporarily increase the small business instant asset write-off (IAWO) threshold to $20,000 for 2023–24, few foresaw that Parliamentary wranglings would delay the passage of the enabling legislation containing the measure. Eligible businesses were left with mere days before year end to take advantage of the incentive.
Legislative framework
The IAWO is contained in section 328-180 of the Income Tax Assessment Act 1997 (ITAA 1997) and forms part of the simplified depreciation regime in Subdivision 328-D of the ITAA 1997. These rules are available only to entities that carry on a business and have an aggregated turnover of less than $10 million (small business entity or SBE).
Under section 328-180, an SBE that has chosen to apply the simplified depreciation rules deducts the taxable purpose proportion (TPP) of the cost of eligible depreciable assets in the income year in which the asset is first used or installed ready for use for a taxable purpose where the asset’s cost is less than the threshold. Any asset whose cost is equal to or greater than the threshold must be added to a general small business pool (the pool). An SBE cannot cherry-pick from within the simplified depreciation rules; for example, it cannot deduct assets that cost less than the threshold and choose not to allocate assets costing more than the threshold to the pool.
Alternatively, the SBE can choose not to apply the simplified depreciation rules, in which case, the normal rules in the uniform capital allowance regime in Division 40 of the ITAA 1997 apply to all the entity’s depreciating assets.
Modification of the standard threshold
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The IAWO threshold in section 328-180 is, and has been since its introduction in 2001, $1,000. Leaving aside a minor temporary modification in 2012, the threshold has been modified six times since 12 May 2015 and is proposed to be amended again for 2024–25 (refer to the discussion below).
For brevity, I will not revisit all the legislative changes to the threshold since 2015; suffice it to say that the modifications to the threshold have not been made to the ITAA 1997. Rather, the threshold settings for SBEs – being $20,000, $25,000, $30,000, $150,000 and uncapped during the COVID-19 pandemic – were made to section 328-180 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A), leaving the standard $1,000 threshold in section 328-180 of the ITAA 1997 unchanged.
The lock-out rule that prevents these entities from re-entering the simplified depreciation rules for five years if they opt out of the simplified depreciation rules continued to be suspended during the periods the threshold was temporarily increased above $1,000.
2023–24 measure
When the Government announced as part of the Federal Budget 2023–24 that it would temporarily increase the IAWO threshold to $20,000 for eligible assets first used or installed ready for use from 1 July 2023 to 30 June 2024, few predicted the legislative process would take more than 12 months.
Parliamentary process
The enabling Bill, the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024, was introduced into Parliament in September 2023; Schedule 1 to the bill contained the legislative changes proposed to give effect to the May 2023 announcement. Six months later, the non-government Senators agreed on 27 March 2024 to amend Schedule 1 to the Bill to increase the proposed asset threshold from $20,000 to $30,000 and the aggregated turnover threshold from $10 million to $50 million for 2023–24.
Where a Bill introduced into one House of Parliament is amended by the other House, those amendments must be agreed to by the originating House or the amendments laid aside for the Bill to be passed in an identical form by both Houses. The Senate’s amendments to Schedule 1 kicked off a stalemate whereby the Bill oscillated between the two Houses for a further three months – the House disagreed with the Senate’s amendments; the Senate insisted on its amendments; the House again disagreed with the amendments; finally, on 25 June 2024, facing the arrival of the end of the income year for which the measure was intended to apply, the Senate did not again insist on its amendments. The Bill was passed in its original form and was enacted on 28 June 2024.
Where has the law landed?
So, where does this leave small businesses for 2023–24? They can claim the IAWO for eligible new or second-hand assets that were first used or installed ready for use from 1 July 2023 to 30 June 2024 and which cost less than $20,000. The $20,000 threshold applies on a per-asset basis, so eligible entities can immediately deduct the cost of multiple identical or similar assets.
Unfortunately, due to the extensive delays in legislating the measure, businesses had mere days to act on the new law. In effect, the measure serves to clarify the treatment of assets already acquired during 2023–24, rather than incentivise businesses to invest in eligible plant and equipment. Understandably, businesses are hesitant to act based on a government announcement without the backing of law.
Importantly, to be eligible for the IAWO, an asset must be first used or installed ready for use for a taxable purpose during 2023–24. It is not sufficient that the entity merely pays for the asset in part or in full, issues an invoice, enters into a contract or places an order where the asset is not delivered until July 2024 or later. Financial and business records rarely contain this ‘first use’ information so reviewing invoices or banking records is not sufficient to evidence that the asset qualifies for the IAWO by 30 June 2024. You need to ask your client when they first used or installed the asset for a taxable purpose, and this must be substantiated if questioned by the ATO.
Noting that the law for this measure did not receive Royal Assent until 28 June 2024, the ATO is focused on helping and supporting taxpayers to claim correctly. The ATO will work with taxpayers who may have claimed incorrectly or made a mistake despite their best endeavours to do the right thing.
Without this amendment, the IAWO threshold would have reverted to the legislated threshold of $1,000 from 1 July 2023.
2024–25 measure
The legislated 2023–24 measure has now been overlaid with the recent announcement as part of the Federal Budget 2024–25 that the $20,000 threshold for businesses with an aggregated turnover of less than $10 million will be extended by 12 months to 30 June 2025. The extended $20,000 IAWO will apply to eligible assets first used or installed ready for use for a taxable purpose by 30 June 2025. Without this change, the threshold will revert to the legislated threshold of $1,000 from 1 July 2024. This will be the seventh time since 12 May 2015 that the threshold will have changed.
Enabling legislation, the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024, was introduced into Parliament on 5 June 2024. Notably, the commencement information relating to Schedule 7 to this bill requires – in addition to the ordinary passage and assent of the bill – the commencement of Schedule 1 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024 (containing the 2023–24 measure) for the 2024–25 measure to take effect. Now that this hurdle has been crossed, it is hoped that the passage of the latter bill will be timelier and provide businesses with certainty well before the end of the 2024–25 income year.
Looking ahead
While temporary increases in the IAWO threshold are welcome and preferable to the standard legislated threshold of $1,000, The Tax Institute continues to advocate for a permanent increased IAWO for businesses with an aggregated turnover of less than $50 million for assets costing less than $30,000.
Temporarily increasing the threshold is clearly favoured by the government and businesses, but the government should desist from annual policy announcements that extend the increased threshold by 12 months at a time, particularly when there are significant delays in legislating the measure – this detracts from its effectiveness. This is an inefficient way to design policy, and businesses deserve certainty and stability in the tax system so they can make decisions based on actual law, not pending announcements.
Notably, the leader of the opposition, the Honourable Peter Dutton MP, announced as part of his recent Budget Address in Reply on 16 May 2024 that a Coalition government would permanently extend the value of assets eligible for the IAWO to $30,000 for small businesses.
Other tax implications
Disposing of or selling a fully expensed asset
Small businesses enjoy the benefits of immediately deducting the cost of eligible assets under the IAWO, but sometimes baulk or do not understand the tax implications of disposing of or selling an asset whose cost was fully deducted under the IAWO.
When a disposal or sale occurs, a balancing adjustment event happens to the depreciating asset. When a balancing adjustment event happens to an asset for which a full deduction was claimed under section 328-180 of the ITAA 1997, the entity must include the TPP of the asset’s termination value (usually the sale price less GST) in its assessable income in the income year in which the balancing adjustment event happened.
What happens if there is a change in the taxable use?
Where an entity claims the IAWO for an asset (based on the TPP of the cost of the asset) and the TPP of the asset subsequently changes, no adjustment is required to be made to the amount of the deduction claimed at the time of the change in taxable use. However, tax implications arise when a balancing adjustment event later happens to the asset.
An SBE that claimed the IAWO and deducted, say, 100 per cent of the cost of an asset in any year, then began to use the asset wholly for a non-taxable purpose, and then sold the asset, would not have any tax consequences at the time of the change in use of the asset. However, the entity would need to include 100 per cent of the sale proceeds in its assessable income, even though the asset is not used for a taxable purpose at the time of the sale.
This scenario is most likely to occur where the SBE is a sole trader. Where the asset is owned by a company or a trust, the FBT or Division 7A provisions are likely to apply to any ‘private use’ of the asset.
About the author
Robyn Jacobson is the senior advocate at The Tax Institute.
About The Tax Institute
The Tax Institute is the leading forum for the tax community in Australia. Our reach includes membership of over 10,000 tax professionals from commerce and industry, academia, government and public practice and 40,000 Australian business leaders, government employees and students. We are committed to representing our members, shaping the future of the tax profession and continuous improvement of the tax system for the benefit of all, through the advancement of knowledge, member support and advocacy. Read more at taxinstitute.com.au
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