Many small business owners would be aware of the 2020 Federal Budget measure to allow their business to immediately claim a tax deduction on the full cost of equipment purchased and installed between 6 October ’20 and 30 June ‘22, no matter the cost.
Interestingly, the same concession also applies to existing equipment, where the simplified depreciation system has been applied.
To be eligible to claim the remaining book value of equipment (new and existing) as a tax deduction in 2020/21, the following criteria must be met;
- The businesses must have an annual turnover of less than $10 million
- The equipment must be depreciated via the Small Business Pool (referred to as the “General STS Pool” on RJC Evans & Co Depreciation Schedules)
This will result in significant tax savings for small businesses in 2020/21. For capital intensive small businesses (such as primary producers), the saving may carry forward to future years.
However, as the below illustration shows, subsequent years may have larger tax bills as a result of this “bring forward” measure. Cashflow planning in these years will be important should the associated equipment be under finance.
|Year 1||Year 2||Year 3||Year 4||Year 5||Year 6||Total|
|Carry Fwd Tax Loss||0||(900,000)||(400,000)||0||0||0||(1,300,000)|
|Post 2020 Budget||Tax (@ marginal rates)||0||0||22,967||195,667||195,667||195,667||609,968|
|Pre 2020 Budget||Tax (@ marginal rates)||16,467||63,367||103,057||130,840||150,288||163,902||627,921|
Notes / Assumptions:
- Equipment cost $2m, and an opening pool value of $1.4m
- Annual cash profit of $500k
- Ignores any additional equipment purchases/sales
- Current 2020/21 marginal tax rates used in both scenarios
- Tax results with differ depending on small business structure (ie. sole trader, partnership, trust, company)