21st January, 2021
Sometimes you’ve got to spend money to make money, and the Instant Asset Write-Off is designed to help Kiwi businesses do exactly that.
Small businesses will be looking for the best way to spend the Instant Asset Write-Off (IAWO) to invest in capital equipment
The New Zealand government previously announced an economic stimulus package that is welcome news to small businesses, which includes an increase to the IAWO threshold to $5,000 (excluding GST) for asset purchases through to 17 March 2021. After this date, the threshold will decrease to $1,000.
This move allows small business owners to deduct the full cost of a business asset with a value of less than $5,000 in the year it was purchased. This is instead of having to spread the cost over the life of the asset.
The Government is raising the threshold so that small business owners continue to invest in their business throughout this and next year given the economically devastating impact of COVID-19.
The measure, which is often referred to as accelerated depreciation, takes the form of bonus depreciation of full expensing, meaning 100 percent bonus depreciation. It was introduced by the New Zealand Government to reignite economic growth, with capital investment crucial for the country’s financial recovery.
New Zealand has a higher percentage of small and micro businesses than other countries, meaning the stimulus measure is likely to have a big impact. (Small businesses are defined as having less than 20 employees.)
New Zealand boasts approximately 530,000 small businesses representing 97 percent of all firms. They account for 28 percent of employment and contribute over a quarter of the country’s gross domestic product, according to Stats NZ.
The first thing small businesses should do to work out whether to take advantage of this measure is to visit their accountant. That way, they can get professional advice about whether the scheme is worth taking advantage of, and how best the money could be invested back into your small business.
Many small businesses that have managed to remain relatively stable during 2020 have utilised the measure to invest in equipment and materials for their business, knowing they won’t be out of pocket for long given the refund from the government is instant.
Making sure the expenditure will help you grow your business is key.
This could mean spending it on equipment to expand into another area or materials you need to keep your business running.
Accountant David Rosenthal, manager of Judge Accountants said many small businesses don’t seem to be aware of the measure, with their eyes lighting up when he explains how it works.
“Most people are getting their affairs in order (debts paid, cash saved) so they can get refinancing in the new year to purchase equipment,” said Rosenthal.
The key is to make sure your small business can actually afford to commit to the investment, he says.
“If you’re going to go for finances to be able to purchase an expensive asset, make sure your balance sheet is clean, and all your debts are up to date and preferably paid off.
Rosenthal recommended that small businesses receiving government payments due to a downturn in business during the COVID-19 crisis wait until this is finished before applying, as banks don’t look favourably if the business is still receiving payments of this kind.
The extra bonus with the Instant Asset Write-Off is if the deduction creates a loss in the 2021 year, you may be able to use that loss with the carry-back loss rules, which allows you to offset current year losses against tax paid in 2019 tax returns, instead of having to wait to use it in future tax years, he explained.
Want to find out if the Instant Asset Write-Off can help your business scale for growth? Find a specialist business advisor near you with our handy Find An Advisor directory today.