The federal budget released earlier this month has been touted as the budget for small business.
As a small business owner myself, it was great to hear Joe Hockey go on about the benefits of small business on the greater economy.
The budget has also been promoted as being a great thing for tradies.
Primarily this is thanks to the $20,000 instant tax deduction.
But what does this tax deduction actually mean, and how can it benefit you and your trade business?
$20k asset write off
Until now, only assets purchased for less than $1,000 could be claimed 100% straight away.
So if you bought an item for $900 you could claim the tax back on the full purchase price on your next tax return.
But if you bought an item for $1,100 you could only claim depredation on your next tax return. So basically you’d only be getting a tax deduction on part of that $1,100 upfront.
What this change means is that you can claim the full deduction now on assets worth all the way up to $20,000 rather than just $1,000.
Let’s say you went out and bought a ute for $20,000. On your next tax return you would be able to claim a tax deduction on the full amount.
With the small business tax rate reducing to 28.5% (previously 30%) that is the amount you’ll be able to claim back.
That’s $5,700 straight back into your pocket at tax time! Not bad at all.
Under the old rules you’d still be claiming the tax back, but it would be over a number of years via depreciation.
So should we be spending up?
The government (and many businesses) would love it if tradies got out there and started spending up big on new equipment and tools.
And when there is such attractive tax deductions available, why wouldn’t you?
Well a wise person once told me that you should never make a decision to do something based purely on the tax benefits.
Sure going out and spending $20,000 on a new piece of gear and getting a $5,700 deduction sounds great, but if you didn’t really need the gear, then it’s kind of $14,300 wasted…
So by all means take advantage of this deduction, but don’t waste money just to get some tax back, and make sure your cashflow can support the purchases.
And lastly, just to be clear, this change doesn’t necessarily put more money back in your pocket.
It simply puts the money there in the first year rather than spreading over a number of years via depreciation.
PS. If you’re looking for tax deductions, remember that public liability, tool insurance and income protection are all 100% tax deductible!
Advice warning
Trade Risk are not qualified to provide tax advice. This information in this article is general in nature and you should consult a qualified taxation professional (such as your accountant) before making any decisions.
