As part of the COVID-19 measures introduced by the Government to assist with cash flow and to encourage spending, the low-value asset threshold was temporarily increased to $5,000 from $500 for the period 17 March 2020 to 16 March 2021.
Previously, assets costing more than $500 had to be capitalised, included in the fixed asset register, and depreciated over the asset’s useful life. This value has been temporarily raised to $5,000 which means that the expenditure can be expensed, and a tax deduction is taken.
Example:
Company A purchased a piece of equipment for $5,000. This piece of equipment has a depreciation rate of 20%.
Prior to 17 March 2020 this equipment would have been capitalised and depreciated. The depreciation expense would have been $1,000 per year ($5,000 * 20%) and the annual tax deduction would have been $280 ($1,000 * 28% which is the company tax rate).
Assets purchased between 17 March 2020 and up until 16 March 2021 we can claim the full cost of this piece of equipment as depreciation in the year of purchase where the tax deduction will be $1,400 ($5,000 * 28% which is the company tax rate).
The threshold will be permanently increased to $1,000 from the 17th March 2021.
The threshold is the GST exclusive amount where the business is GST registered, and the GST inclusive amount for non GST registered businesses.
For businesses who are considering asset purchases at between $1,000 and $5,000 this financial year, to get the best tax result we suggest you complete these purchases before 16 March 2021.
There are a number of considerations to bear in mind, the most important being that items purchased at the same time from the same supplier and depreciated at the same rate are treated as a single purchase for the purposes of the threshold.
Be careful with that last part especially – if you go shopping for a whole bunch of computer gear with the same depreciation rates.
