Tonight in Canberra, Federal Treasurer Joe Hockey delivered his second budget speech, with a very clear focus on small business. One thing that jumped out at me was the announcement that small businesses could claim an instant $20,000 deduction from tonight. With plenty of that likely to be spent on technology I thought I’d check out just what that means.
Joe Hockey was clear:
“we recognise that small business, in order to succeed, needs better cash flow and better tools for innovation as well.
So I announce, that from 7:30pm tonight, small business can claim an immediate tax deduction for each and every item they purchase up to $20,000.
From tonight, it can be instantly written off to reduce your tax liability.”
To break this down, on this week’s episode of Your Tech Life I spoke to the guru – Adrian Raftery – Mr Tax Man, Lecturer at Deakin University who I’ve spoken to before on tax matters. He too was surprised by the news – “Almost fell of my chair when I saw $20,000, I thought wow this is a huge incentive I didn’t see coming”
But does that really mean if you have cash in the bank, you can spend it and get it back at tax time? Adrian explains:
“That $20,000 net cost, you put as a deduction in this year’s tax return, whilst it’s 100% tax deductible, you only get the benefit back at your marginal tax rates, which for a small company is 30%”
“You spend $20,000, you get a 30% discount from your tax, which is $6,000, so your cash outflow from this transaction is still $14,000”
“Whilst you may be outlaying the money, you’re not getting all of it back. You’re only getting a portion – in this case 30% and that will reduce to 28.5% from the 1st of July.”
In my example presented to Adrian this week, a new computer – “For a $3,000 computer purchase, a deduction (which would see a tax benefit of $900) would be spread over 3 years, however with this new incentive you get the immediate 100% deduction, so you’ll get $900 in one hit, rather than $300 each year over three years.”
So. Relax. Yep, it’s an excellent incentive from the Federal Government, but if you’re in small business – see your accountant before you spend up big – ok?