4th December, 2020
You may have heard that temporary full expensing under the Instant Asset Write Off (IAWO) has arrived, and that means larger businesses are now considering how they can make the most of it.
The Instant Asset Write-off is a tax deduction designed to do what it says on the tin: allow business owners to write off any eligible expense, immediately. And it’s recently been expanded so that bigger businesses get access, too.
Understandably, many business owners see ‘instant write-off’ as a call to spend up big in an attempt to quickly grow their business (and that’s why it features in the Government’s economic recovery plans), but it’s important to plan ahead and consider your long-term purchase strategy.
To be more specific, ask yourself: will making use of the IAWO actually help you achieve your goals?
Determining whether it’s a good time to scale, or a good time to maintain the status quo is a central question for business owners and entrepreneurs, and certainly not one with a quick, easy answer. And whether or not you utilise the IAWO scheme to purchase new assets, may depend a lot on whether it’s time to scale or not.
Here are a few things to consider:
Where do you want to take your business? You need to have a laser focus on the ‘big picture’ strategy and understand the ultimate goal for your business. When you have that focus, you can clearly chart the path you need to get there.
Your endgame will determine your day-to-day, week-to-week, month-to-month and even year-to-year strategies – and that will determine when and what assets to buy.
With an endgame in hand, you should have a fairly clear roadmap for the major assets you’ll need to acquire along the way.
While the primary objective of a business is to increase shareholder value, sometimes rapid increases in growth don’t result in long-term gains in value. This is particularly true in situations where growth simply can’t be achieved sustainably.
This could occur in a complicated economic period (such as during a pandemic) where there is too much risk to a business that’s stretching itself. Or perhaps a business that grows beyond a certain threshold will be subjected to additional regulation that could be costly to adopt. In these cases, growth would mean taking on excessive amounts of debt, and that would lead to overleveraging and financial stress. In those cases, it won’t make sense to invest in additional assets despite the benefits of tax breaks, such as the IAWO scheme.
Lack of cash can be a big hurdle for growing a business and it’s important to understand that the IAWO is not a solution for cash flow difficulties. It’s not a scheme that gives you cash to buy an asset – it simply gives you a tax break for that investment.
While that’s fantastic at tax time, if you can’t afford the asset to begin with, the IAWO won’t solve that problem for you.
On the other hand, if your cash flow is healthy, you’ve identified that certain priority assets will help you achieve further growth, and receiving a tax break on those assets makes them affordable, then the IAWO isn’t something to be left on the table.
If you can sustainably grow, you should also consider whether you even need to acquire more assets to do so. Many businesses won’t need additional assets to experience growth. These may be service providers whose business ‘assets’ are in the area of staffing, for example. On the other hand, businesses that depend on acquiring or selling products throughout the year will likely need to acquire more products each year in order to sustain growth.
Business growth is essentially expansion. It’s making your company bigger by increasing its market and making it more profitable. How you do this, and whether or not you need more assets to accomplish it, will be different for every business. But looking at statistics such as overall sales, number of staff, market share and turnover can give you some insight.
If you believe that acquiring more assets is the key to growth – and that growth can be undertaken sustainably, the IAWO will be a great vehicle for getting those assets at a discounted cost.
And don’t forget these three key areas of consideration when thinking about your asset requirements:
When it comes to acquiring business assets, there are some that are vital to running your business. There’s no doubt that you need them. Utes for a farming conglomerate, warehouses for an importing company and computer equipment regardless of the type of business you run – essentials are essentials.
But even when you know you need to invest in some assets, it may not always make the best sense to buy them. And this is a question that is difficult for even the most experienced executives. Here are a few things to think about.
When considering whether to continue to lease an asset, or buy under the IAWO scheme, it’s important to consider whether you are just making someone else rich, or if you can bring those payments in-house for your own benefit.
If you have the opportunity to buy your commercial building, that could make strategic sense if you strike the right deal. Businesses sometimes make large asset purchases to maximise opportunities and minimise overheads. And, an owned property means a business isn’t beholden to a third party in terms of how it utilises the premises.
You’ll also want to consider the other benefits to your business. If you need to acquire a fleet of trucks for your business, for example, can you make them part of your business platform? Can you use them for bigger marketing opportunities? Can you utilise them in other ways within your business to give you a competitive advantage? And are you fully aware of the different tax implications of buying these vehicles for your business? If so, it’s worth buying rather than leasing.
Assets may be treated differently under various tax laws. Some may be easy to write off, and clearly fall under the IAWO scheme – for example, new computers. Others, such as work vehicles, aren’t so simple to understand.
Getting tax advice on where you’ll actually get benefits from the IAWO scheme is vital before taking advantage of it. While many larger businesses will have a head of finance assisting in these decisions, smaller businesses would be well advised to seek specialist advice from a tax practitioner.
But that’s because no matter what the asset is – property, automobiles, refrigerated warehousing – you’ll need to consider your numbers carefully. Think about the cost of monthly lease payments and multiply it by the number of years you plan to be in business. Understand your cash flow and where your liabilities arise.
Ultimately, your asset acquisition strategy should be designed to ensure you’re never in the position of being short on cash or overleveraged.
The earlier your business starts to create wealth, the better, and if new assets can help you do that, the IAWO can help you get them.
If you’d like to stay up to date with the latest industry insights and what schemes are available to you, stay informed with the MYOB Business Newsletter.
The information in this article is general in nature and not to be taken as personal advice. If you would like to find out more about whether the IAWO is suitable for your needs, start a conversation with a qualified professional today.