Watch out for the sting in the tail!
The tax cost of trading in your assets after 30 June 2023 could become very expensive for your business.
The COVID period brought with it a number of very generous tax concessions, the likes of which we hadn’t seen before. The early concessions such as the cashflow boost and Jobkeeper were permanent government hand-outs which are being ‘repaid’ by all taxpayers through future tax policy. However, later tax concessions such as full expensing of capital assets and reduced tax instalments were merely allowing people to defer taxes that they will need to pay later. We have already seen a catch-up in taxes from reduced tax instalments. However, the impact of full expensing will not be felt until businesses seek to ‘trade-in’ their assets they acquired during the full expensing period.
Consider the following example:
Small business Farm Co acquired a tractor in November 2020 for $700,000 (plus GST) which it expensed under temporary full expensing measures resulting in a tax benefit of $175,000. The acquisition was funded through asset finance. Farm Co is looking to acquire a new tractor for $800,000 (plus GST) in November 2023. This will also be financed. The trade-in value offered is $500,000 (plus GST).
The net cost of the trade-in and new asset which will need to be financed will be:
|Cost of new tractor||$800,000
|Fund received for trade-in||($500,000)
|Existing finance pay-out||$500,000
|Net amount to finance||$800,000
The tax effect of the trade-in and new asset will be:
|Assessable amount on trade-in||$500,000
|First year depreciation||($120,000)
|Net assessable amount||$380,000
|Net tax on trade-in (at 25%)||$95,000
Therefore, the actual cost (including tax) of the trade-in to be financed in the first year will increase to $895,000.
If the tractor had been acquired in September 2020 and the business was eligible for small business depreciation (<$10m turnover) the business would still have received a full deduction for the tractor in the 2021 year. However, the tax effect of the trade-in would be different:
|Assessable amount on trade-in||Nil*
|First year depreciation (15%**)||($45,000)
|Net deductible amount||($45,000)
|Net tax benefit of trade-in (at 25%)||($11,250)
Therefore, the net cost of the trade-in would be more than $100,000 less if the asset was acquired two months earlier.
We expect this tax position will create substantial cash-flow issues for businesses who are not aware of the effect of reversing the temporary full expensing deduction. We recommend you seek advice before looking to dispose of assets where the temporary full expensing deduction has been claimed.
Where a lower trade-in value is offered, and there is a discount given on the price of the new tractor, it may result in a better tax outcome.
You will also need to make sure you keep records of when you acquired assets and the particular deduction concession you applied to the asset. This will make a critical difference to the outcome when you sell. Where you haven’t already engaged us to manage your asset register, we can help you document this for the future.
Alternatively, where you have the new asset installed ready for use prior to 1 July 2023, you may still obtain a full tax deduction for the acquisition which will offset the taxable amount on the trade-in.
Government concessions post 30 June 2023
The Government has announced transition measures which will allow some relief for businesses:
• A one-year temporary full expensing measure for small business taxpayers with aggregated turnover less than $10m for assets costing less than $20,000 and installed ready for use before 30 June 2024; and
• A 20% bonus deduction for businesses with aggregated turnover less than $50m for certain energy efficiency assets acquired (up to $100,000) before 30 June 2024.
We have not yet seen the legislation for these concessions, but it may possibly be limited to certain ‘active’ asset holding entities. If you are intending to acquire assets costing less than $20,000 or energy efficiency assets, we recommend you contact us to make sure you are achieving the best tax outcome from the acquisition.
 Through writing off the balance of the small business pool.
 This can be offset against the cost of the new tractor under small business pooling measures.
 This will be on the net trade-in amount of $300,000 ($800,000 less $500,000).
Plan ahead for EOFY
Tax planning before the end of financial year is critical for every business. Bentleys’ business advisors can help you to make informed financial decisions and navigate you through the requirements.
Want to know more about how Bentleys can help your business? Make a time for a chat with a Bentleys business advisor. We can help you to get where you want to be.
We have also prepared a comprehensive EOFY guide to help you step through the different opportunities, how they should be implemented, and the future tax cashflow consequences from adopting the strategies.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.