Before 17 March 2020 any business asset with a useful life of more than 12 months, that cost more than $500 + GST had to be capitalised and depreciated. This meant that the tax deduction for those purchases was spread over a number of years, depending on the IRD’s assessment of the useful life of the asset. The full cost could not be claimed as a tax deduction in the year of purchase.
For example, if you bought a standing hydraulic office desk for $475+ GST before 17 March 2020 you could claim the total cost as an expense in the year you bought it. But if you bought an upgraded version for say $600 + GST before 17 March 2020 you would have capitalised and depreciated it. This effectively meant you could only deduct say 13% on the reducing value each year (say $78 the first year), or 8.5% ($49) each and every year.
A temporary tax rule change on 17 March 2020
To give relief to businesses and encourage investment during the Covid-19 pandemic the government temporarily changed the tax rule, so that between 17 March 2020 and 16 March 2021 the threshold for small/low value asset purchases changed from $500 to $5,000.
This means that for any business asset purchased on or after 17 March 2020 and before 16 March 2021 costing less than $5,000 + GST an immediate tax deduction can be claimed. If you are trading as a company (28% tax) a purchase of $5,000 saves $1,400 in tax in the year of purchase. If you are a sole trader on the current top tax rate of 33% then a purchase of $5,000 saves $1,650 in tax.
From 17 March 2021
After 17 March 2021 the spending threshold for an immediate tax deduction permanently reduces from $5,000 + GST, to $1,000 + GST.
If you are thinking of buying a business asset costing up to $5,000 + GST then you have until 16 March 2021 before the tax deduction rule changes again.
Beware of fishhooks
There are a few fishhooks to be aware of:
- If multiple assets with the same depreciation rate are acquired from the same supplier at the same time, the $5,000 threshold applies across all the assets acquired (it is not a per asset threshold); and
- If the asset being acquired actually forms part of another item of depreciable property an immediate deduction is not available.
If you are unsure what to do please contact us.
Finally, our standard tax advice remains:
“Never spend a dollar to save 28 cents or even 33 cents in tax.
Only spend a dollar if it will improve your business efficiencies or add value.”