Small Business $20,000 Write-Off

By Jason Fittler

The Small Business $20,000 write-off in this year’s budget is pure genius by Joe Hockey.

However, I have heard a lot of complaining from interest groups. And I watched in disbelief, as a couple of Morning Show hosts did not have the technical ability to grasp the concept or understand how it worked.

More disappointing was an ABC host who clearly had no idea but lots of opinion.

Let's take a couple of minutes to look at this proposal and how it will help small business and the economy in general.

There are a couple of points we need to be clear on to understand this measure:

  1. Small Business is defined as a business with revenue of less than $2 million.
  2. If the items cost $20,001, then you do not get the deduction the item will be depreciated (written off over a number of years) as per current tax laws.
  3. You can do as many of these deductions of items up to $20,000 as you like until the scheme finishes in 2017.
  4. The small business does not receive the $20,000 back. The $20,000 is a deduction so it will reduce the tax that small business will pay. For example if the small business in incorporated and pays the 30% tax rate for 2015, then they will save $6000 in tax.
  5. All tax rules in relation to depreciation still apply as such if the business was to sell the asset after it was completely written on the proceeds from the sale would be considered income and they would have to pay tax on it.
  6. The use of it is limited as $20,000 is a lot of money to a small business as such they will only use it where needed.

Why is the $20,000 write-off such a great measure?

It is fairly fool proof, as most small business operators are smart enough not to waste money so they will most likely spend it on equipment, motor vehicles and computer hardware.

Most likely, they will now undertake an expense that they have been putting off due to uncertain trading conditions.

The spend by small business will be a boost to retailers. This boost in retail should also flow through to more jobs as retailer’s sales increase.

We have already seen car yards advertising along with Harvey Norman and no doubt, JB Hifi will be getting ads ready.

The Small Business $20,000 write-off does not cost the government anything; there is no outlay of money by the government to create this stimulus. Sure the government will receive less tax revenue in the first year the asset was purchase but this will be recovered in the follow years when the small business will not have the depreciation deduction due to the asset having already been written off.

For most small business, it will mean a saving of around $10,000 in tax that I expect will initially be used to by equipment but $10,000 is not enough to employ more people.

The other measure of reducing the tax rate of small business (less than $2 million in Revenue) from 30% to 28.5% as off the 01/07/2015 will have less of an effect.

Perhaps a better measure would have been to get rid of the red tape around employing people for small business as I suspect that this is a major barrier for small business when looking to employ someone.