For years, small businesses in Australia have benefited from the Instant Asset Write-Off (IAWO), a tax incentive allowing them to immediately deduct the cost of eligible business assets. However, the government has not budgeted for the $20,000 threshold to continue beyond 30 June 2025, meaning that from 1 July 2025, the threshold is set to drop significantly to just $1,000. Unless an extension or legislative change is announced, this will mark a major shift in the way small businesses approach asset purchases and tax planning.
A Look at the Instant Asset Write-Off’s History
The IAWO threshold has fluctuated over the years in response to economic conditions and government policy changes. Here’s a brief look at how the threshold has changed:
- 1 January 2014: Reduced to $1,000 after previously being $6,500
- 12 May 2015 – 30 June 2017: Temporarily increased to $20,000 to stimulate business investment
- 29 January 2019 – 2 April 2019: Raised to $25,000
- 2 April 2019 – 11 March 2020: Further increased to $30,000
- 12 March 2020 – 30 June 2021: Significantly increased to $150,000 during the COVID-19 pandemic to support businesses.
- 1 July 2023 – 30 June 2025: Set at $20,000
- From July 2025: Expected to revert to $1,000 unless a new policy is introduced.
What Does This Mean for Small Businesses?
If the threshold reverts to $1,000, businesses will no longer be able to claim an immediate deduction for most asset purchases. Instead, they will need to depreciate these assets over their effective life, reducing the tax benefits they receive in the year of purchase.
For example, under the current $20,000 threshold, a business that purchases a new piece of equipment for $15,000 can claim the full deduction in the current financial year, reducing taxable income immediately. However, from 1 July 2025, that same asset would need to be depreciated over several years, resulting in smaller annual deductions and less immediate tax relief.
Impact on Business Investment Decisions
The reduction in the threshold could significantly alter the purchasing behaviour of small businesses:
- Reduced cash flow benefits: The ability to instantly write off assets has provided businesses with greater cash flow flexibility. Without it, businesses will need to plan for smaller deductions spread out over multiple years.
- Potential delays in asset purchases: Businesses may reconsider whether to invest in new equipment, vehicles, or technology, especially if the tax benefits are no longer immediate.
- More complex tax planning: Small businesses that have relied on the IAWO will need to work more closely with accountants to optimise their tax strategies.
What Businesses Should Do Before 30 June 2025
To make the most of the current $20,000 threshold, businesses should consider taking action before the expected change takes effect.
- Assess Asset Needs Now: If your business is considering purchasing new equipment, vehicles, or technology, it may be beneficial to do so before 30 June 2025 to take full advantage of the current threshold.
- Review Cash Flow & Budgeting: With tax deductions spread over several years, businesses should plan their budgets accordingly to accommodate potential changes in liabilities.
- Stay Informed: Keep up to date with any government announcements regarding the IAWO. If an extension or adjustment is introduced, it will be important to factor that into your financial planning.
- Consult with an Accountant: Hervey Bay Tax Solutions can help navigate these changes and develop a strategy to maximise tax benefits while maintaining healthy cash flow.
Will the Government Extend the $20,000 Threshold?
At this stage, the government has not indicated any plans to extend the current $20,000 limit beyond June 30 2025. However, given past adjustments to the IAWO in response to economic conditions, there is a possibility that future federal budget or policy changes could alter the outcome.
Final Thoughts
The expected drop in the Instant Asset Write-Off threshold from $20,000 to $1,000 will have a significant impact on Australian small businesses. Those that have benefited from the ability to instantly deduct asset purchases will need to rethink their tax planning and cash flow management. By staying informed, and making strategic purchasing decisions before 30 June 2025, businesses can better prepare for the changes ahead.
If you need advice on how this change will affect your business, speak to us at Hervey Bay Tax Solutions, our friendly team can help you navigate the transition effectively.