$20,000 Immediate Tax Deduction, Confusing

karl-stefanovic

Karl Stefanovic of the Today Show is not alone in the confusion surrounding the proposed $20,000 immediate tax write off announcement.

Under changes introduced in the Federal Budget earlier this month, small businesses will receive an immediate tax deduction for any individual assets they buy costing up to $20,000.

The incentive means that businesses will be able to receive the full (100%) tax deductions for vehicles, tools, computers, ovens, machinery, processing equipment and so on, for the year they are purchased irrelevant of the number of days held, rather than having to depreciate the assets over several years as per previous legislation.

I have been asked many times about the new (proposed) ruling and have noticed that there are a lot of people who misunderstand or are confused with the concept, see Karl Stefanovic on the Today Show.

A suggestion that businesses are getting a “free” $20,000 golden egg handout, which is an unfair advantage that investors are receiving, “yes we’re paying for the rich to buy more investment property”, was one remark.

Well, this is not the case;

Firstly, it is not available to residential property investors as it is for small businesses with a turnover less than $2 million.

Secondly, It is not a handout or a refund it is a tax deduction, for every dollar you spend, you only get a portion of that back as a deduction, to receive the deduction you have to be earning an income, it’s a deduction.

To explain in layman’s terms, I have used a simple analysis. Think of it as a tax credit, it lowers your tax threshold, this can be better explained by the diagram below.

Gross Income $100,000 $100,000
Tax Depreciation NOT CLAIMED $20,000
Taxable Income $100,000 $80,000
Tax Payable $28,500 $22,800

The figures are used as an example only

By claiming a deduction it lowers your tax threshold saving you $5,700 in tax payable.

This is a simplified example for illustration purposes, for specific details you need to speak with your accountant or financial advisor.

a blog written by, James Hannah Tax Depreciation Specialist.