The end of the "Instant Write-Off" era: What you need to know about depreciation post July 1, 2023

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In recent years, businesses have benefited from generous Temporary Full Expensing measures.

However, they will need to adjust to new rules that have taken effect as of July 1, 2023. In some cases, businesses may even have to hand back some of these benefits.

Temporary Full Expensing for depreciating assets is gone

The 2023/24 Budget removed this concession and returned small to medium businesses to the pre-COVID-19 depreciation and asset write-off rules of 2019.

Since July 1, 2023, investments in equipment do not come with large tax deductions.

Small business tax deductions for depreciating assets

Small businesses with less than $10m turnover will receive an Instant Asset Write-Off (IAWO) for each eligible asset costing less than $20k.

This write off is installed and ready for use between July 1, 2023 and June 30, 2024.

For assets valued at $20k or more, no immediate deduction is available.

Instead, we return to using the small business simplified depreciation pool, where assets are depreciated subject to rules under subdivision 328-D of the ITAA 97.

In the first year, the depreciation rate is 15 per cent, and 30 per cent each subsequent year.

Medium business tax deductions for depreciating assets

Unfortunately, medium businesses (those with a turnover of more than $10m), are not eligible for any IAWO deductions from July 1, 2023.

All businesses upgrading equipment after July 1, 2023 should be aware that this change may create additional income on the trade.

However, the depreciation allowed on new purchases cannot fully offset this income.

Example scenario:

Small business farming clients Matt and Laura have operated successfully over the past few years.

They have regularly upgraded their equipment and have benefited from the temporary full expensing of assets.

These assets were fully depreciated by June 30, 2023.

Matt received their new header order in September 2023, which cost $900k, plus GST.

Thankfully, they made a good trade of $500k plus GST, leaving a net change-over of $400k.

Under previous rules, this would reduce their net income by $400k in the current year, vastly helping their tax position.

Without the IAWO, this transaction actually increases farm income by $365,000 for 2024, creating an unexpected tax burden.

The header trade of $500k (previously claimed as Temporary Full Expense) is treated as profit on sale, increasing business income for the year.

The pooling of the new header purchase will limit the depreciation available to $135k in 2024 (15% of $900k).

As such, Matt and Laura will need to plan ahead to manage their taxes.

What tax planning strategies could help Matt and Laura?

Our advice to Matt and Laura would involve considering a range of tax planning strategies available to them and examining how each strategy will affect their cash flow. In trying to achieve an optimal tax position.

Planning gives us the opportunity to add value to your business and help you achieve your goals.

We have been using this proactive approach based on a deep understanding of our clients for over 100 years.

For more information, please contact your local RSM Adviser.

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