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Why you need to take advantage of the instant asset tax write-off this EOFY

Light-commercial vehicles up to $150,000 qualify for an instant tax write-off, but so do passenger cars up to $57,581.

The government wants to buy you a new vehicle so much that it’s willing to give you up to $150,000 to do so, via it’s special, limited-time-only instant tax write-off, which means, according to a qualified accountant, there’s never been a better time to purchase than right now.

The limit for the instant tax write-off (ITWO), which was raised to $150,000 for any single asset purchase for small and medium businesses on March 12 from the previous limit of $30,000, will drop precipitously back to just $1000 on July 1 this year.

And that makes this year’s end of financial year (EOFY) sales quite possibly the most tempting, and affordable, we’ve ever seen.

The ITWO scheme, which applies to any business from a sole trader working at home with a laptop right up to those turning over $50 million a year, can be a little confusing for the layman to understand, which is why we asked Mark Chapman, director of tax communications for H&R Block, to explain it to us.

“Basically, because it’s going back to $1000 on July 1 from $150,000 now, you’ve got this narrow window to make these big purchases of a car or a van or a work vehicle, so now is very much the time to do it,” Mr Chapman said.

“If you’re in a position where you can afford to make the purchase, you should, and even if you had to get finance to buy, it would be worth looking at, because interest rates are very low at the moment, too.”

Mr Chapman revealed that, according to his company’s research, only 74 per cent of small-business owners were even aware of the existence of the write-off scheme (although anyone with a good accountant would have been encouraged to use it), and that less than half of those people had actually taken advantage of it.

That is at least partly because so few people understand how it works, and what the benefits are, but also because not everyone has the cashflow to take advantage of it, according to Mr Chapman.

“It’s a combination of factors, because some people might have heard of it, but they don’t necessarily know the ins and outs of how it works, but a lot of businesses, particularly at the moment, might not have the cash flow to go out and buy a large asset, like a vehicle,” he said.

So, can you explain how it works - in layman’s terms, please, Mr Accountant?

“Well, it’s quite unique, because it’s an immediate tax deduction for any item costing up to $150,000, and that means that whatever you spend comes off your taxable income for the tax year 2019-2020. You only pay tax on the reduced figure, so it’s really valuable tax deduction,” Mr Chapman explained, slowly and carefully.

“A lot of people think that the word ‘immediate’ implies that you get a cheque, an immediate refund, but what it means is that you get all of the deduction in one go. Under the old rules you had to write off the cost of what you’d spent on assets, over a number of years, and on motor vehicles it was four or five years, so it took a lot longer to get your money.”

Mr Chapman says it’s also vital to recognise what counts as a “vehicle” bought for your business, versus a company “car”.

The detail of the ITWO reveals that you can spend up to $150,000 on new or second-hand commercial vehicles, so trucks, utes, vans and heavy vehicles. If you want to buy a car, which is defined as a conveyance “designed to carry a load of less than one tonne and fewer than nine passengers”, then the amount you are allowed to spend, and deduct, drops to just $57,581.

But why can’t small-business types just buy a Porsche, why does the cost of a “car” have to be so low? Chapman has a good chuckle at that idea.

“You have to go back to the old days where governments and tax payers didn’t want to give people tax relief for buying fancy cars - it’s never been a government policy to give tax deductions for Porsches, so the upper limit was set for a normal car,” he said.

“That’s why there is an expensive-car limit, it is adjusted upwards, periodically; at the moment it’s around that $57,000 mark.

“The problem is one of definition, though, as the price limit doesn’t apply to other kinds of vehicles. In the past, utes and big SUVs were just workhorses, they were pretty basic, and you couldn’t pay that much for them.

“These days you’ve got very fancy utes and four-wheel drives, they’ve become quite sophisticated luxury vehicles in some cases, so the evolution of those vehicles has transcended the loophole the limit was actually trying to close.

“If you choose carefully, and buy the right kind of vehicle, you can go all the way up to $150k, and make out that it’s not really a ‘car’ at all.”

Mr Chapman said it’s important to do your homework, of course, and to check with your car dealer where the vehicle you’re looking to buy comes under the definitions.