Prepay and pooling offset

words by Finlease

Having recently written an article about the very significant increases in depreciation (up to 30% under the simplified tax system) now available to larger companies with an annual turnover of up to $10mil (click here for more information on Accelerated Depreciation), there are 2 additional aspects which provide further benefits.

At the risk of sounding like Tim from a Demtel commercial “but wait there’s more”, there actually is!!

Depreciation offset rules

Under the pooling provisions within the simplified depreciation system ALL assets sit in this pool.

If an asset which has been depreciated to say $100,000 (as a part of an overall $800,000 pool) and it is sold for $300,000, there is no immediate “profit on sale” extraordinary income issue and resultant tax bill. The overall pool is simply reduced to $500,000. In other words there is not a tax liability created on the “profit from the sale of asset” it simply reduces the balance of the pool for future depreciation. In this context, the profit on sale simply being the value the asset is sold for relative to its written down value (WDV).

Similarly when a new asset is purchased for say $600,000 after the sale of the old asset, the pool value would increase from $500,000 to $1.1million.

Now remember, the depreciation rate on this overall pool is 30% diminishing value (15% for the 1st year on any new asset coming into the pool and then 30% for each year after that), so the level of depreciation claim will alter each year as a function of this however at substantially higher levels than previously claimed prior to entering into this accelerated depreciation pool.

Deductible Prepayment of expenses.

The other benefit available to larger companies with a turnover up to $10 million per annum is now the ability to claim deductions for the prepayment of up to 12 months on allowable expenses. For profitable companies with good cash flow, this is an ideal way to Pre pay some of next year’s expenses and receive a tax deduction for them this year.

In a tax regime where you not only have to pay this year’s tax but also prepay next year’s expected tax via the PAYG % estimate of turnover on your quarterly BAS, any reduction in these expenses are beneficial.

At the risk of being a government Groupie, this change in the recalibration of small business from $2mil to $10mil in annual turnover has given an enormous number of businesses some real benefits in increased legitimate tax deductions which will go a long way to preserving cash.

As the largest employer of people in Australia, Small Business has, through the above initiatives, been given a more supportive environment from which to grow and prosper.

Mark O’Donoghue, CEO & Founder of Finlease

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