Life after the Instant Asset Write Off

Article by Neil Hooper

as featured in the Farm Weekly issue 16 June 2022

Most readers would know that the instant asset write off was extended through to June 2023 in the May 2021 budget. So, there are another twelve months to take advantage of these measures.

But what does life look like after 1 July 2023? And what will happen if the new item of plant that is due to arrive in June 2023 does not arrive until July of that year? This is a real possibility with delays in manufacturing and shipping worldwide.

From 1 July 2023, depreciation rules revert to normal, meaning most businesses will receive a deduction of only 15% of the value of machinery purchased.

The impact of this is best shown by an example.

Assume you ordered a new combine harvester that is due to arrive on farm in June 2023. The cost of this machine is $800,000 and you are trading your existing machine for $500,000. If it arrives in June 2023 and is delivered to the farm, then the net $300,000 changeover will be a tax deduction in the 2022/23 financial year.

But if delivery is delayed until July 2023, then not only do you miss out on the $300,000 tax deduction in 2022/23, but the tax implications of the header changeover in 2023/24 are less than ideal.

Firstly the $500,000 trade will be assessable in full on the basis that this would have been written down to nil in 2021 (when businesses under $10 million turnover were able to write off their depreciation pool balances).

Secondly, assuming that you are utilising the simplified deprecation rules, you will only be entitled to 15% depreciation on the $800,000 new machine. This results in a tax deduction of only $120,000.

So just to clarify this:

1.   If the machine is delivered on time in June 2023, you will receive a net tax deduction of $300,000 in 2022/23 year.

2.   If the machine is not delivered until July, you not only miss the deduction in 2022/23, but you will be assessed on $380,000 ($500,000 profit less deduction of                        $120,000) of taxable income in 2023/24!

Note that the deductions over the life of the machine will be the same, but the delivery date will have a big impact on the timing of the tax deduction. And as always, there must be a commercial case to buy the machine in the first place, not just a tax driven decision!

 

To discuss this article further, we encourage you to contact Neil Hooper on (08) 6274 6400, or your Byfields accountant.

Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice.

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