SME owners urged to reassess depreciation rules amid complexity concerns
Small business owners have been advised to take more care when applying the small business depreciation rules as they may not be as worthwhile as anticipated, a tax specialist has said.
The specific and intricate eligibility criteria for the small business depreciation rules such as the instant asset write-off (IAWO) can increase complexity for SME owners and their accountants, contrasting their positive impact.
Skye Francis, founder and director of 2PR, said that based on her experience and knowledge of the tax space, she had chosen to not apply the small business depreciation rules to her own business, despite working with clients who did apply them.
Speaking on a recent Under the Hood podcast episode, Francis noted she wasn’t advising other small business owners to do the same but advised them to consider all options, weighing all costs and benefits with their accountant.
“As a small business owner. I actually had to really think about whether I wanted to apply these myself and full disclosure, I'm actually not,” she said.
“The reason is, as an accounting firm, a lot of my assets are things that have got a pretty short life. You know, a laptop only has a two-year life and doesn't fall within the IAWO threshold, which if it doesn't fall within the threshold, a 30 per cent life is about a six-year effective life, so I didn't want to actually limit myself.”
Francis said this decision came from her not seeing any value in the IAWO for her own business as she didn’t want the burden of dealing with differentiating rules for her assets.
This decision was also attributed to the fact that “simplicity was best” when it came to tax and understanding how this impacted a business, as well as the lack of deductions from her assets not being “a big deal” within the grand scheme of things.
“I like to use accounting and tax being equal. It makes things simple, especially for a really small business. The IAWO, as much as it's a great tax measure, isn't the greatest from an accounting perspective for me,” Francis said.
“It doesn't give me an idea of how long I think my assets are going to last, the value of my assets, or give me a really good indication of when I might have to replace it, so that's why I haven't chosen to use it myself.”
“Now does it mean I've got lower tax deductions? Absolutely. But in the grand scheme of things, with pretty short life assets, it's actually not that big a deal.”
Francis noted for small business owners who had assets that sat above the $20,000 threshold, or had a mixture of assets that sat above and below the threshold, there could be significant differences when applying the IAWO or not, highlighting the importance of differentiating between the depreciation rules and division 40.
Francis noted she often saw people using the small business rules for assets under the $20,000 threshold and then incorrectly using division 40 for other assets, when it was crucial that the methods were not mixed due to differences in excluded assets.
When the rules were applied incorrectly, problems could emerge for both taxpayers and their accountants, Francis said.
“The taxpayer is the one that causes the risks, and then it’s often the accountants that are doing the work around this. The taxpayers are relying on the accountants to get it right, and if they don’t get it right, then there’s trouble,” she said.
“The reality is that most fixed asset registers will have at least something wrong with them, at least one thing. I guarantee it. It’s just a question of how big it is. The reality is that a lot of the time the difference is depreciation might not be that huge, or people perceive it as not a big risk.”
“The other time I see people finding things that might be wrong with it is if they switch accountants and another accountant picks it up and tries to understand what's happening.”
Francis advised anyone looking to apply the small business depreciation rules to work with their accountant to ensure it was the right fit for their small business.
“Don't underestimate the work your accountant is going to have to do to check your eligibility,” Francis said.
“It's best to do it straight up, not waiting for the tax office to come and audit it. Rely on your accountant. Talk to your accountant and be honest with them.”
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