EOFY write-off for expenses in small business

But beware of poor advice

Now we’re in May, everyone’s prepping up for end of financial year. There was even a recent budget to go with that. Now, many small business owners around the country are looking at their profit and loss and deciding if they’re in the red or the black for the year, what dividends or salary they might be paying themselves and what they might purchase for their business before the end of the tax year.

This year, especially, it might be worth a thorough review of your financials as the instant asset write off – now called temporary full expensing, designed to stimulate the economy, prior to and especially during Covid, is coming to an end.

Need a reminder of what that is? Essentially, it was an economic stimulus measure that allowed small businesses to fully expense the business portion of any taxable purpose asset with no cost restriction* as long as it was purchased, installed, and being used by June 30, 2023. *Cars are a little different as they’ve got a threshold of $64,741.

Temporary full expensing is available to all businesses with an aggregated turnover below $5 Billion (and if purchasing 2nd hand assets, an aggregated turnover less than $50Million) – again until June 30, 2023.

What qualifies for EOFY write-off?

According to the ATO, it’s things like machinery and equipment (farm equipment can be a little different though), tools of trade, fixtures and fittings, signage, air-conditioners, IT hardware, office and shop furniture, and motor vehicles. AND… it’s for the business portion of those items.

Why would an EOFY write-off matter?

If you’re likely to end up with a tax bill in FY22-23, writing something off as an expense can bring your tax bill down significantly.

For example;

If your turnover in FY22-23 was say (for the sake of nice round numbers) $1million and your business expenses were $500K. Your profit = $500K. Tax on that, if you’re a small business and a registered company is 25% or $125K. But if you purchased and installed $250K of equipment by June 30 in addition to your expenses, then your profit is only $250K and your tax payable becomes $62.5K.

Likewise if your turnover is $500K and your expenses are $300K. $200K profit means $50K in tax is payable. However if you purchased a car (and let’s just say it was 100% business use) for say $50K, your profit drops to $150K and your tax payable becomes $37.5K. It’s not quite as exciting a drop in tax as the first example, however, a drop in tax payable, is still a drop in tax.

After June 30, 2023, the instant asset write-off reverts to being available only to small business (<$5Million in turnover) and only for purchases up to $20K – care of the latest budget. To be fair, we thought they might take it all the way back to the $1K it was about a decade ago – which would have really limited what assets a business owner might expense in any given year.

So you can see why the end of this financial year will likely mean sellers of higher priced items will be really gearing up their sales pitches for end of financial year sales. But…

Beware poor EOFY write-off advice

Before you go on a wild spending spree though, just because someone tells you your purchase will be tax deductible or falls under the full temporary expensing rules, doesn’t necessarily make it so. Let me tell you why.

Not understanding EOFY write-off timing

A friend of mine is due to move offices shortly and was going to spruce up the new office with some new furniture. The sales person assured them that because it was for the office, it was instantly deductible, as long as they purchased it before June 30. It sounded all good. BUT…the new office kit out had a 16 week delivery schedule. Which meant it would be delivered late August/early September; some 8-12 weeks AFTER the end of financial year. Which meant, you guessed it, it wouldn’t be installed, delivered or in situ prior to June 30 and would, therefore, NOT be eligible under the temporary full expensing rules. Luckily my friend checked with her accountant first and found a different supplier that could guarantee delivery before end of financial year.

It is the same for cars. Another friend of a friend, ordered (and put a deposit on) an electric vehicle almost a year ago with the idea of it being promised for delivery this financial year. But, sadly, that vehicle is still in Europe and isn’t likely to make that cut off either and will need to be depreciated in the usual fashion over years instead.

Incorrect EOFY write-off advice on purchases

The same goes for business, financial, and tax advice especially when it comes from sources other than qualified and/or licensed practitioners.

Just this week, I came across two examples where believing incorrect advice could have come with a hefty fine.

Travel – a client asked me about something she’d seen on social media where she could EOFY expense a quick trip to Fiji (and not for a valid business conference either) because it was under five days long. Big sigh. Let’s be very clear. That’s a holiday regardless of length of stay unless you could provide evidence of a very valid business reason for the trip and the ATO would be very displeased that someone had claimed their holiday as a business expense item. Not to mention other people have tried this in the past and failed and been heftily fined for it. You have been warned.

Massages – then we heard a report of a company offering in office massages as an EOFY business expense – think to soothe the stresses of those working in an office and thus make them more productive. Gosh, wouldn’t that be nice. No, wait! Whilst the sales pitch of greater workplace productivity, even staff retention, is timely, it’s not a valid business expense per se.

That’s not to say, you as a business owner couldn’t do it, it’s just that because you’re providing a benefit of a personal nature to your staff (or yourself as an employee) the ATO refers to that as a fringe benefit – and you guessed it, there’s a tax for that. Yup, and it comes with a whole host of extra nasties – but that’s a blog for another time.

As with all things, if it sounds too good to be true, it probably is (and wishing won’t make it so, nor will claiming ignorance). Hence, we’d encourage you to double-check with your accountant prior to making decisions based on hearsay, especially if someone is trying to sell you on a purchase.

Of course, if you need good, qualified advice for your end of financial year planning or we can help you transition your business to cloud accounting with Xero (especially whilst there are still govt tax incentives) so you have a clearer handle on your tax affairs, we’d love to help. You can call us on 6023 1700 or connect with us via Facebook or LinkedIn.