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The Treasurer has been urged to amend an unintended negative consequence of the increased instant asset write-off that could see small businesses worse off than before the threshold change.
Treasurer alerted to instant asset write-off anomaly
15 September 2020
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8 minute read
The government’s move to increase the instant asset write-off to $150,000 as part of its COVID-19 stimulus package could create some anomalous outcomes for taxpayers forced to claim an outright deduction because its general pool balance is less than the increased threshold, said the National Tax and Accountants’ Association.
In a letter to the Treasurer, the NTAA has urged the government to consider amending legislation to allow taxpayers that have a general pool balance less than the $150,000 instant asset write-off threshold for the 2020 year to have a choice of claiming an outright deduction or continue depreciating the general pool at 30 per cent.
Using an example of a sole trader who did not purchase any depreciating assets from 12 March 2020 onwards, the NTAA said the taxpayer would be worse off over five years by just over $3,400 because of the anomaly.
“The taxpayer in question, a sole trader truck driver, was required to claim a deduction for a general pool balance of approximately $107,000 in the 2020 income year. Had the IAW threshold remained at $30,000, this deduction of $107,000 would have been spread over a number of income years,” the NTAA said.
“Looking at the 2020 income year in isolation, the taxpayer appears to have achieved a good result with no tax liability for the year. Indeed, had the Response Package Act not been enacted into law, he would have instead had a tax liability of approximately $10,300.
“However, over a five-year period (i.e. from 2020 to 2024), assuming consistent revenue and expenses, the picture is very different. This is because the same taxpayer has a total tax liability (including Medicare levy and taking into account, where applicable, the low income tax offset and the low and middle income tax offset) over this period approximating to an extra $3,400 over five years as a result of a legislative change in the 2020 income year that they could never have reasonably anticipated. This completely wipes out and makes very illusory the $10,300 tax ‘saving’ in the 2020 income year.”
The NTAA also provided a separate example of a small business discretionary trust that “wasted” $3,000 of franking credits because of the increase in the instant asset write-off threshold.
It believes the government should provide entities with a choice, to prevent the unintended consequence.
“This scenario is commonplace among many SBE taxpayers, where they had no willingness or financial capacity to acquire any depreciating assets from 12 March 2020 onwards,” the NTAA said.
“However, due to the lifting of the IAW threshold from $30,000 to $150,000, they are forced to claim a significant tax deduction in respect to their general pool balance in the 2020 income year, in lieu of deductions which would have otherwise been spread over a number of income years.
“It is very clear that Parliament’s intention with respect to its Coronavirus Economic Response Package was not to make taxpayers worse off than what they would have otherwise been if the Response Package Act had never been implemented.”
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- Has their been any amendments as yet to ensure a choice can be made rather than being thrust upon the tax payer?0
- I'm a sole trader and like to keep my business so I end up paying little or no tax (jobseeker, child support, FTB etc comes in nicely). I have the cash to buy a new car (business/private split) around $50k. I do NOT want it to be instantly written off as most of the deduction benefit will be wasted as I won't have that much turnover - I want it to depreciate over time so the next few years get deductions for it (to keep my profits low). This means I cannot buy it before 1st Jan 2021 as the IAW threshold is $150k. In January it goes down to $1k (so the ATO says) meaning I can buy the car then and put it in a small business pool, depreciate it by 57% this year (accelerated) and then 30% each subsequent year. The problem (like this article says) is that what if the ATO raise the threshold in 2021/22 up from the $1k to say $30k again. I would be forced to write off the pool in that year, which is not what I want. If they don't raise the threshold, then great. But we're at the mercy of constantly changing (even part way through a tax year!) thresholds but with a rule saying we must write off the pool if we can. When we create the pool we know the threshold. But then they change the threshold, so why can't we have the option to change what we do with the pool. SO unfair.
If I don't want to risk the threshold rising and having to empty the small business pool in one swoop, then I can "opt out" of simplified depreciation and just use the normal prime cost depreciation method to depreciate the car over 8 years (with accelerated 50% immediately too). If I do get any future assets over $100 then I will have to use normal depreciation for them with possibly a low value pool. I gather I cannot "rejoin" the simplified depreciation facility for 5 years if I opt out but with hardly any assets then missing out on instant write offs shouldn't be a problem. I know I will also have to depreciate my $3500 asset normally (with accelerated) too but thats not a problem.
Up until now I have never had to worry about depreciation as all assets have been below the threshold at the time (yes I am new to depreciation but have read lots!). But the risk of the threshold increasing from $1k again might be too high...forcing me to opt out of the simplified depreciation facility...
0 - Balance sheets for any clients preparing financial reports using pooling are decimated by this change. Tax Agents/Accountants are now considering using different tax/accounting depreciation for the smaller level of clients because of this and it will cost the client more money because this is a double-up.
People using pooling last financial year are trapped - but the ATO have scrapped the 5 years in/out of pooling,so you need to consider pooling very carefully now.
Thanks for making this NEWS, but such a shame it taken SO LONG for the Professional Associations to jump on board with this? For the majority of SME taxpayers, this is devastating and sole traders in particular. Their $18,200 tax free threshold is now being soaked up with tax losses which they may have otherwise had a better handle on.0 - Not just the tax implications, but the affects on obtaining finance because your profit is now reduced by the write off amount.0
- Borrowing capacity is assessed on Accounting Net Profit, not taxable income0
- They know this, I remember when they provided cost projections for this and there was a positive return to the government from years 3 and 4 for exactly this reason. They stopped their projection at year 4 but had they continued it would have provided a net positive tax outcome.0
- i think it is by design. Write off asset pools which forces some tax payers to be looking for new assets to keep something depreciating. Also if the business closes down in the next few years there will be higher recouped depreciation collecting higher tax $ for the Govt.0
- I always thought that you had the Choice to claiming the Instant Write off or not and just claim the General 15%/30%
0- No choice the way I read it.
0 - If the balance of the small business pool prior to calculating the deduction is below the instant asset write-off threshold then the pool must be written off. No choice so long as the simplified depreciation rules are being used.0
