In recent years, businesses have benefited from generous Temporary Full Expensing measures. However, they will need to adjust to new rules that have taken effect as of 1 July 2023. In some cases, businesses may even have to hand back some of these benefits. What will that mean for farmers?
The 2023/24 Budget removed this concession and returned small to medium businesses to the pre-COVID-19 depreciation and asset write-off rules of 2019. From 1 July 2023, investments in equipment do not come with these large tax deductions.
Small businesses with less than $10m turnover will receive an Instant Asset Write-Off (IAWO) for each eligible asset costing less than $20k. This write off is installed and ready for use between 1 July 2023 and 30 June 2024.
For assets valued at $20k or more, no immediate deduction is available. Instead, we return to using the small business simplified depreciation pool, where assets are depreciated subject to rules under subdivision 328-D of the ITAA 97. In the first year, the depreciation rate is 15%, and 30% each subsequent year.
Unfortunately, medium businesses (those with a turnover of more than $10m), are not eligible for any IAWO deductions from 1 July 2023.
All businesses upgrading equipment after 1 July 2023 should be aware that this change may create additional income on the trade. Importantly, the depreciation allowed on new asset purchases may not fully offset this additional income.
Watch out for how a machinery upgrade will be taxed. PIc: AgriShots
Small business farming clients Matt and Laura have operated successfully over the past few years. They have regularly upgraded their equipment and have benefitted from the temporary full expensing of assets. These assets were fully depreciated by 30 June 2023.
Matt received their new header order in September 2023, which cost $900k, plus GST. Thankfully, they made a good trade of $500k plus GST, leaving a net change-over of $400k.
Under previous rules, this would reduce their net income by $400k in the current year, vastly helping their tax position.
Without the IAWO, this transaction actually increases farm income by $365k for 2024, creating an unexpected tax burden.
The header trade of $500k (previously claimed as Temporary Full Expense) is treated as profit on sale, increasing business income for the year.
The pooling of the new header purchase will limit the depreciation available to $135k in 2024 (15% of $900k).
As such, Matt and Laura will need to plan ahead to manage their taxes.
Our advice to Matt and Laura would involve considering a range of tax planning strategies available to them and examining how each strategy will affect their cash flow while trying to achieve an optimal tax position.
Planning gives us the opportunity to add value to your business and help you achieve your goals. We have been using this proactive approach based on a deep understanding of our clients for over 100 years.
Paul Rogan is a Director at accounting firm RSM specialising in tax advisory for agricultural business.
This article originally appeared at the RSM insights blog. Republished with permission.
