We've had a huge number of questions through the help desk this month on the $20k instant asset write-off. Here are the top Q&As live from the Knowledge Shop Help Desk:
- Private motor vehicle transferred to a trust
- Trigger point for $20k deduction: paid or installed?
- Motor vehicle balloon payments & the immediate deduction
- Does artwork qualify for the immediate deduction?
- What’s included in the cost of a motor vehicle?
- GST included for the immediate deduction?
- Do inter-entity depreciating lease agreements qualify?
- Can an asset purchased before budget night qualify?
- Partnerships, motor vehicles and the immediate deduction
- Are parts or the whole included in the $20k limit?
1. Private motor vehicle transferred to a trust
Our client personally owns a motor vehicle in their own name. They want to transfer it across at market value to the family discretionary trust. Assuming the motor vehicle is under $20,000 and a log book is to be kept, they are then looking to claim an immediate asset write-off in the trust.
Is there an issue with this?
Firstly, you would need to check that the trust is classified as a small business entity and would qualify for an immediate deduction under the simplified depreciation rules.
You should also be aware that there is a risk that Part IVA could apply to this arrangement to deny the immediate deduction if the car was being transferred from the individual to the trust with the sole or dominant purpose of obtaining a tax benefit.
See the extract from the explanatory memorandum to the Tax Laws Amendment (Small Business Measures No. 2) Bill 2015 below:
“1.18 While a specific provision has not been included under these amendments in relation to artificial or contrived arrangements, the general anti avoidance provisions are intended to be applied to arrangements of that kind. In the event of evidence that small business entities systematically engaged in artificial or contrived arrangements designed to take advantage of the increased threshold and the general anti-avoidance provisions became too administratively difficult to apply, retrospective amendments to explicitly prohibit such behaviour would be considered to ensure that the integrity of the small business capital allowance provisions is maintained."
If the client is planning to transfer the car to the trust at market value and is hoping to be able to claim the immediate deduction then it would be a good idea to clearly document the non-tax reasons for this transaction (e.g., to explain the commercial reasons etc).
2. Trigger point for $20k deduction: paid or installed?
A client is about to purchase equipment which will cost approximately $7,000 AUD. They were under the impression that if they paid before June 30, they could claim the deduction in this financial year’s tax return? However, the equipment won’t be delivered and installed until the end of July, so does that mean we have to wait until next year to claim it?
I read this on the ATO website so just wanted to clarify: "Businesses need to ensure that they only claim a deduction in the year in which the asset is first used or installed ready for use and to the extent to which the asset is used in an income earning activity for a taxable purpose"
Question: Claimable this financial year or next?
If the client purchased business equipment (a depreciating asset) on 30 June 2015 but only took delivery at the end of July 2015, it is unlikely that the equipment would be considered as first used or installed ready for use as at 30 June 2015. If so, the business equipment costing less than $20,000 would only be immediately deductible by the business in the 2016 income year.
See the explanatory memorandum to the Tax Laws Amendment (Small Business Measures No. 2) Bill 2015.
3. Motor vehicle balloon payments & the immediate deduction
If a motor vehicle is bought on lease and the balloon payment is payable now and is less than $20K can we write it off?
First, it is necessary to determine whether the client is the owner of the motor vehicle when the lease arrangement was first entered into.
With a lease arrangement, the client could have been treated as the holder of the motor vehicle when the client started leasing the motor vehicle. For example, if the terms of the lease provided a residual value which was less than the expected market value of the motor vehicle at the end of the lease then the ATO could treat the client as having started to hold the vehicle for depreciation purposes when the lease began. If so, the residual payment would not qualify for the immediate write-off rules for SBE for depreciating assets costing less than $20,000 as the motor vehicle would have been acquired for tax purposes before Budget night (when the lease arrangement was first entered into).
On the other hand, if the terms of the lease provided a residual value which is more than the expected market value of the motor vehicle at the end of the lease, the client is much more likely to be only treated as the owner of the motor vehicle after they have paid the balloon payment (residual payment). If that is the case and the client is a SBE, the client should be entitled to the immediate deduction (based on the business use percentage of the motor vehicle) provided that the balloon payment is less than $20,000 and was made after Budget night.
See the explanatory memorandum to the Tax Laws Amendment (Small Business Measures No. 2) Bill 2015.
4. Does artwork qualify for the immediate deduction?
A local art gallery has advertised to come in and buy any artwork up to the value of $20,000 for your business to receive an immediate tax deduction. A client of mine wants to do this. My question is, I thought the asset had to be used for an income-producing purpose? Would a piece of artwork qualify?
Paintings and other works of art can potentially qualify as depreciating assets if they are used in conjunction with the taxpayer's business activity, they have a limited effective life and are reasonably expected to decline in value.
TR 2014/4 confirms that artworks which qualify as depreciating assets would have an effective life of 100 years. If the prime cost method is used then this would mean 1% per year.
The ruling also states that the depreciation rules will only apply to works of art and reproductions of artwork that are tangible in nature, such as paintings, sculptures, drawings, engravings and photographs, that are displayed in open viewing areas in premises used for taxable purposes including reception areas, waiting rooms and foyers.
If the taxpayer is a SBE and is using the simplified depreciation rules they should be able to claim an immediate deduction for the artwork purchased from Budget night if it will be used in the taxpayer’s business activities, costs less than $20,000 and is reasonably expected to decline in value.
5. What’s included in the cost of a motor vehicle?
A SBE client wants to purchase a motor vehicle and apply the $20,000 immediate write off concession. Can you please confirm if stamp duty, CTP, registration and/or optional extras are included as part of the $20,000 or are they separate items that is not included to form the $20,000.
This depends on whether the amounts are included in the cost of the vehicle for depreciation purposes.
Any payments incidental to starting to hold the asset (e.g., stamp duty) should form part of the cost of the vehicle for the purposes of calculating cost for depreciation purposes. The cost would also include optional extras that are fitted to the vehicle and do not have a separate identity and function in their own right.
However, amounts paid for registration, insurance, extended warranty etc., should not be included in the 'cost' of the vehicle for depreciation purposes.
6. GST included for the immediate deduction
Can you please confirm the following:
1. Asset purchased for $19,800 (excluding GST) for machinery, total invoice is $21,780. I’m assuming the asset can be claimed under the $20,000 small business tax break, as the asset is only $19,800 and GST is not included as part of the tax break. Can you please confirm correct.
2. If the above assumption is correct. On two separate invoices – Invoice 1 - client has purchased machinery at $19,800 (excluding GST) and Invoice 2 - client has purchased additional accessories for $3,700 (excluding GST). Can you please confirm if the assets are allowed as a deduction under the $20,000 small business tax break, as they are separate assets?
1. If the client is registered for GST and can claim back the GST credits, then the immediate deduction should be available if the GST-exclusive amount is less than $20,000.
2. This really depends on whether the accessories represent separate depreciating assets in their own right. The immediate deduction could potentially apply in this case if either:
The accessories are separate depreciating assets in their own right and do not form part of the machine; or;
The machine was purchased and used in one income year (e.g., the 2015 income year) with an immediate deduction being available and the additions to the machine were purchased and installed / used in the following income year (e.g., the 2016 income year).
7. Do inter-entity depreciating lease agreements qualify?
I have a client that holds assets in one entity (for asset protection) and it hires that equipment across to the trading entity. The asset holding entity a partnership used to trade in its own right but it now rents the premises and the equipment across to the trading entity a company. The company is owned by the same partners of the partnership. There is no formal hire or rental agreement but it is done on a commercial rent. The new $20,000 concession exempts a deduction for equipment leased or hired under a depreciating asset lease.
Would my client if they purchased in the asset holding partnership (hiring informally to the trading company) be excluded from claiming this concession because it is viewed as a "depreciating asset lease". This term refers to the same definition as used in the STS depreciation rules. The only ruling I can find on this definition is ATO ID 2011/72 which went to show how short term hire would not be excluded under the definition of "depreciation asset lease" but it gave me no clarity on the treatment of an informal hire between related entities.
There are a few issues to consider here.
1. The simplified depreciation rules are only available if the entity seeking to claim the deduction is classified as a small business entity in its own right. The entity needs to carry on a business in its own right and have aggregated annual turnover of less than $2m. The normal SBE grouping rules apply which means that you would need to aggregate the turnover of the partnership and company if they are connected entities (e.g., controlled by the same third party). This will depend on the situation.
2. Next you would need to confirm whether the partnership carries on a business in its own right. In order to be eligible for the immediate deduction the entity which buys the assets must be carrying on a business in its own right. If the partnership simply rents equipment to the trading entity for a fixed fee and does not have its own employees to run its operations then there is a risk that the partnership is not carrying on its own business.
ATO guidance on whether a service entity is carrying on its own business can be found in TR 2006/2 (refer to the examples at the end of the ruling).
3. When it comes to the simplified depreciation rules for SBEs, the specific exclusions from these rules are also relevant. Section 328-175 ITAA 1997 ensures that assets are excluded from the SBE depreciation rules if they will be, or might reasonably be expected to be, let predominantly on a depreciating asset lease. These assets would not qualify for any of the simplified depreciation rules, including the immediate write-off rules.
The definition of depreciating asset lease is contained in section 995-1 and is an agreement (including a renewal of an agreement) under which the entity that holds the depreciating asset grants a right to use the asset to another entity. However, a depreciating asset lease does not include a hire purchase agreement or a short-term hire agreement.
A short-term hire agreement is an agreement for the intermittent hire of an asset on an hourly, daily, weekly or monthly basis. However, an agreement for the hire of an asset is not a short-term hire agreement if, having regard to any other agreements for the hire of the same asset to the same entity or an associate of that entity, there is a substantial continuity of hiring so that the agreements together are for longer than a short-term basis.
While this would need to be reviewed in more detail, based on the limited information provided it seems likely that these assets would be excluded from the simplified depreciation rules.
8. Can an asset purchased before budget night qualify?
Is an SBE which purchased a depreciating asset costing less than $20,000 prior to budget night eligible for the 100% deduction if:
a) the asset was paid for prior to budget night but was not delivered/installed ready for use until after budget night or
b) the asset was paid for after budget night and was not delivered/installed ready for use until after budget night
The Budget announcement simply referred to assets that were first used or installed ready for use from Budget night onwards. However, the EM to the Bill containing the new rules confirms that the assets must be both:
- First acquired at or after 7.30pm AEST 12 May 2015; and
- Are first used or installed ready for use by 30 June 2017.
The EM confirms that assets that were acquired before Budget night will continue to be subject to the $1,000 threshold, even if the assets are first used or installed ready for use after Budget night.
In your client’s case, if the client entered into a contract to acquire the assets before Budget night then it seems that they would continue to be subject to the $1,000 threshold rather than the $20,000 threshold even if payment was made after Budget night.
9. Partnerships, motor vehicles and the immediate deduction
I have a partnership client that is an SBE, and over the years each of the partners have been responsible for their own cars and claim them as a deduction against their partnership distribution in their individual tax returns.
One of the partners is considering purchasing a canopy for their existing ute at a cost of $3,000 if they were to do so are they able to claim an immediate deduction for the $3,000 as the ute is used mainly in the SBE business mentioned above.
In order to be eligible for the simplified depreciation rules the taxpayer needs to qualify as a small business entity in their own right. If the business is operated by the partnership then the partnership could be classified as a SBE. However, unless the partners carry on a separate business as a sole trader they would not be classified as a SBE. Refer to section 328-110(6) ITAA 1997.
This means that if the assets are held personally by the partners and are not assets of the partnership the simplified depreciation rules will not be available unless the partner is personally classified as a SBE.
10. Are parts or the whole included in the $20k limit?
A client is working on constructing a machine for his business. If the machine ends up costing more than $20,000 in total but consists of parts all costing less than $20,000 each (for example, the engine cost $7,000, the structure $5,000, etc.) are these amounts eligible to be written off in line with the new accelerated depreciation rules in regards to SBEs or is it the total gross amount that must be used (In this case it would be over $20,000 and ineligible)?
Your client cannot claim an immediate deduction for the individual parts used to construct the machine as they are not separate depreciating assets in their own right. They cannot function separately by their own without being part of the machine. As a result, you would need to look at the total cost of the machine.
One of the tests that is used in this case is a test of function. The Commissioner's views on the application of the functional test are set out in TR 94/11. Some of the factors to be considered in applying the functional test include:
- whether the item is capable of being separately identifiable;
- whether the item is capable of performing its own separate function; and
- whether the item varies the performance of another item.