Although much publicity after recent budgets surrounded the ability for larger businesses to claim 100% depreciation (immediate write-off) on assets purchased of less than $30,000, the reclassification of a small business to incorporate companies with a turnover of up to $10million, this 100% write off is “small change” compared to what has now available to those sub $10mil turn over companies under the Simplified Depreciation Rules.
Simpler depreciation for small business
Under the Simplified Depreciation Rules, company owners can actively elect to place all of their assets in a pool for depreciation purposes and claim depreciation rates of 15% in the 1st year and 30% in each subsequent year (on a Diminishing Value basis).
This was previously a benefit only afforded to companies with a turnover of less than $2 million but has now been opened up to much larger organisations.
Owners of businesses in such capital intensive industries as manufacturing, transport, civil and other related fields should take heed of this depreciation bonanza which became available to them from 2017.
The best way to explain this is via the following example:-
XYZ Cranes runs a fleet of 20 cranes, has a turnover of $8 million p/a, a profit of $1 million p/a and resultant tax bill of $300,000 p/a.
The current written down value of their crane fleet is $4 million and they have been historically depreciating their cranes at 7.5% DV ($300,000) p/a which was expensed prior to the $1million profit.
In 2017, XYZ Cranes (who are now reclassified as a Small Business) placed all of their cranes into the new Simplified Depreciation System prior to June 30 2017 and claimed 15% DV depreciation for the 2017 financial year and 30% for 2018 and beyond on their $4million fleet.
The depreciation in 2017 climbed from $300,000 (7.5% DV) to $600,000 (15% DV) with the extra $300,000 reducing their taxable profit from $1 million to $700,000 resulting in the tax bill reducing from $300,000 to $210,000.
The depreciation in 2018 climbed from $300,000 (7.5% DV) to $1,020,000 (30% DV) with the extra $720,000 reducing their taxable profit from $1 million to $280,000 resulting in the tax bill reducing from $300,000 to $84,000.
It is important to remember the diminishing value methodology of this accelerated depreciation, which on the above figures would show the following profile for future years:-
Although the example has been used for a crane company, this could easily be applied to companies who require large amounts of expensive equipment such as manufacturing, earthmoving, transport or concrete pumping companies (just to name a few).
If you are a company involved in such capital intensive industries, who historically incur significant tax liabilities or expect to do so, it is advisable speak with a specialist in this area or your accountants as a matter of absolute priority to investigate this significant opportunity.*
As the late Kerry Packer most famously said the 1991 Senate Enquiry “if anyone in this country doesn’t (legitimately) minimise their tax, they want their heads read”.
Mark O’Donoghue, CEO & Founder of Finlease
*Finlease does not provide formal tax advice and would advise business owners speak with their accountants on these matters.
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