The small business instant asset write-off (IAWO) threshold has been temporarily increased, yet again, allowing eligible small businesses to fully and immediately deduct the cost of eligible depreciating assets. While seemingly straightforward, with all the changes year in and year out, understanding the fine print and ensuring your business and your clients get it right is important.
Legislative framework
The IAWO, in section 328-180 of the Income Tax Assessment Act 1997 (ITAA 1997), sits within the simplified depreciation rules (SDR) in Subdivision 328-D of the ITAA 1997. These optional rules are available to entities that carry on a business and have an aggregated turnover of less than $10 million (small business entity or SBE). In working out an SBE’s aggregated turnover, its annual turnover must be grouped with that of any entities ‘connected with’ the entity and that are ‘affiliates’ of the entity. Working out the aggregated turnover of an entity is an exercise in itself, beyond the scope of this article.
An SBE can choose whether it applies the SDR or the general uniform capital allowances (UCA) regime in Division 40 of the ITAA 1997. If it chooses to apply the SDR, it must adopt all the rules in Subdivision 328-D and cannot cherry-pick from the various rules. In particular, an SBE cannot choose to write off an asset costing less than $20,000 using the IAWO but use the UCA rules for assets costing $20,000 or more instead of the pooling rules in Subdivision 328-D. An SBE can choose not to apply the SDR, in which case, the UCA rules apply to all the entity’s depreciating assets.
An SBE that has chosen to apply the SDR must deduct 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 (section 328-180 of the ITAA 1997). Where the asset’s cost is equal to or more than the threshold, the asset must be allocated to a general small business pool (the pool). Where the pool balance at the end of the respective income year (before applying any depreciation deductions) is less than the IAWO threshold, the pool balance must be deducted.
Temporary increase in the standard threshold
The IAWO was introduced in 2021. The threshold in section 328-180 has always been, and still is, $1,000. Aside from 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 (see the discussion below).
Notably, the temporary increases in the IAWO threshold since 2015 — to $20,000, $25,000, $30,000 and $150,000, then uncapped during the COVID-19 pandemic — were given effect by section 328-180 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A). The permanent $1,000 threshold in section 328-180 of the ITAA 1997 has remained unchanged.
The lock-out rule that prevents entities from re-entering the SDR for five years if they opt out of the SDR continues to be suspended during the periods the threshold is temporarily increased above $1,000.
2023–24 threshold
The IAWO threshold for eligible new or second-hand assets that were first used or installed ready for use from 1 July 2023 to 30 June 2024 has been temporarily increased to $20,000. This change was effected by Schedule 1 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024. After much debate, a stalemate that lasted several months earlier this year and oscillation between the two Houses of Parliament, the enabling bill was finally enacted on 28 June 2024. Without this legislative amendment to section 328-180 of the IT(TP)A, the IAWO threshold would have reverted to the legislated threshold of $1,000 from 1 July 2023.
To be eligible for the temporarily increased IAWO, the asset must cost less than $20,000 (after claiming any GST credits to which the entity is entitled). The $20,000 threshold applies on a per-asset basis, so eligible SBEs can immediately deduct the cost of multiple identical or similar assets.
Further, an asset will be eligible for the $20,000 IAWO only if it is first used or installed ready for use for a taxable purpose during 2023–24. Entering into a contract, placing an order, receiving an invoice or making payment for the asset in part or in full is not enough if the asset is not delivered until after 30 June 2024. A business’ financial records do not usually contain the information needed to establish an asset’s ‘first use’ so invoices or banking records will not be sufficient to evidence that the asset qualifies for the IAWO in 2023–24. The date on which the asset was first used or installed for a taxable purpose needs to be determined and substantiated if queried by the ATO.
As the enabling legislation giving effect to the $20,000 threshold for 2023–24 was not enacted until 28 June 2024, some taxpayers may be confused and claim incorrectly. The ATO is focused on helping and supporting taxpayers to claim the IAWO correctly and will work with taxpayers who make a mistake despite their best endeavours to do the right thing.
2024–25 threshold
Now that the 2023–24 threshold has been legislated, the focus turns to the Government’s announcement as part of the Federal Budget 2024–25 that the temporarily increased threshold of $20,000 for SBEs 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 amendment, the threshold will revert to the legislated threshold of $1,000 from 1 July 2024. If enacted, this will be the seventh time since 12 May 2015 that the threshold will have changed.
Schedule 7 to the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024, introduced into Parliament on 5 June 2024, proposes to give effect to the Government’s announcement.
What assets are excluded from the IAWO?
The following exclusions and limits apply to the IAWO:
- The car limit ($68,108 for 2023–24 and $69,674 for 2024–25) applies when working out the allowable depreciable amount for a car, although few cars used for a business purpose would cost less than $20,000.
- Any GST credit to which the entity is entitled to claim (because it is registered for GST and is making a creditable acquisition) is excluded from the cost of the asset, and if only a portion of the GST credit can be claimed, then the cost is reduced by the portion of the GST credit that can be claimed.
- Assets that cost $20,000 or more must be allocated to a pool and depreciated using the pooling rules.
- The TPP of the cost of an improvement to an asset that has been written off under the IAWO in a previous income year can also be written off under the IAWO if the cost of the improvement is less than the IAWO threshold. The cost of any subsequent improvements cannot be immediately deducted and must instead be placed into the pool.
- The UCA rules must be used for the following assets:
- assets that are leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease;
- assets allocated to a low-value pool before using the SDR;
- horticultural plants, including grapevines;
- software allocated to a software development pool (but not other software);
- assets used in research and development (R&D) activities; and
- capital works, including buildings and structural improvements.
Some primary production assets can be depreciated using either the UCA rules or the SDR.
What are the tax implications when a fully expensed asset is disposed of or sold?
Small businesses that immediately deduct the cost of eligible assets enjoy the benefits of the write-off but may 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. If an immediate deduction was claimed under section 328-180 of the ITAA 1997 (as modified or temporarily increased by section 328-180 of the IT(TP)A) for an asset to which a balancing adjustment event later happens, the TPP of the asset’s termination value (usually the sale price less GST) must be included in the entity’s assessable income in the income year in which the balancing adjustment event happened.
What happens if the taxable use of the asset changes?
The TPP of an asset may change after its cost has been fully deducted under the IAWO (based on the TPP at the time it was first used or installed ready for use). No adjustment is required to be made to the amount of the deduction claimed when the taxable use of the asset changes. However, there are tax implications when a balancing adjustment event later happens to that asset.
Assume that an entity claimed 100% of the cost of an asset under the IAWO based on the asset being used wholly for a taxable purpose. Sometime later, the entity began to use the asset wholly for a non-taxable purpose before selling the asset a few years later. There are no tax consequences at the time the taxable use of the asset changes from 100% to 0%. However, the entity is required to include 100% of the sale proceeds in its assessable income in the income year in which the asset is sold, even though the asset is used solely for a private purpose at the time of the sale.
This scenario is most likely to occur where the entity 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.
Will we continue to see annual changes to the IAWO?
The Government has clearly favoured temporarily increasing the IAWO threshold as a key policy for the small business sector. Businesses have welcomed the higher thresholds, preferring them to the standard legislated threshold of $1,000.
However, significant delays in legislating the temporary increases (the measure for 2024–25 remains before the Parliament) have frustrated businesses that just want certainty so they can make commercial decisions based on actual law, not pending announcements. Drip-feeding annual policy announcements each Federal Budget to extend the increased threshold by 12 months at a time is an inefficient way to design policy and businesses deserve better.
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.
Of relevance as we move closer to the next Federal election, the Leader of the Opposition, the Hon Peter Dutton MP, announced as part of his 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.
