Qualifying Assets for the Instant Asset Write Off

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As you are aware, the Government increased the instant asset write off threshold from $25,000 to $30,000 for assets first used or installed ready for use between 2 April 2019 and 30 June 2020. The business turnover threshold to access the instant asset write off was also increased from $10 million to $50 million on that date. After 30 June 2020, the asset threshold will reduce to $1,000 and the business turnover threshold to $10 million.

With a limited period of time for taxpayers to take advantage of the higher thresholds, it is timely to consider the asset eligibility criteria for the instant asset write off.

Per Asset Basis

The asset threshold applies on a per asset basis so that several assets costing less than $30,000 could qualify for the instant asset write off. Accordingly, it is necessary to consider whether expenditure incurred on the purchase of assets can be allocated to ‘composite items’ (i.e. separately identifiable assets) costing less than $30,000.

Taxation Ruling 2017/D1 has provided guidance on identifying composite items for the purposes of working out depreciation. The ruling states that ‘a composite item is an item that is made up of components that are capable of being separately identified or recognized as having commercial or economic value’. The following example in Taxation Ruling 2017/D1 illustrates this point:

The Warehouse Corporation purchases storage racks for use in its warehouse. Multiple racks make up a single row. Each row of racks is physically separate from each other row and is capable of storing goods independently of any other row. The racks within each row rely on other racks within that row for their structural stability and therefore their ability to perform their storage function. As each row is functionally complete in itself, it is a separate depreciating asset. However, each rack within a row is not functionally complete in itself; the racks merely form part of the row. Any new rows that are acquired will be separate depreciating assets.

To identify items eligible for the instant asset write off, it is often insufficient to rely on suppliers’ invoices, as these may only provide amounts for a bundle of composite items (for instance, in the example above, the invoice issued by the supplier may invoice for multiple rows of storage racks).

Any separately identifiable assets not eligible for an instant asset write off is allocated to the General Small Business Pool for SBE entities only. That is, medium sized entities with a business turnover between $10 million and $50 million are not eligible for SBE pooling.

Depreciating Asset

The instant asset write off is only available for depreciating assets, which are assets that have a limited effective life and that can reasonably be expected to decline in value over time.

However, the following assets are excluded from this definition:

  • Items of trading stock;
  • Certain intangible assets; and
  • Amounts deductible as construction expenditure on capital works

Taxable Use

The instant asset write off applies to the total cost of the asset, not just its taxable portion. For instance, if the cost of an asset is $32,000 and you have determined that the taxable portion of the asset is $24,000, the asset will be ineligible for the instant asset write off as its total cost exceeds $30,000.

If you would like to discuss any of the above, please contact Gaurav Chitnis.

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