Buying or selling equipment in the 2024 financial year - WATCH OUT!!
Many small businesses have taken advantage of the 100% depreciation rates that were available over the last couple of years, particularly through the COVID years.
RWK Director, Kingsley Smith breaks down the facts for small businesses that took claimed 100% depreciation. Read on to understand the implications of selling and buying equipment for the 2024 financial year.
What is not so well known is the limit for claiming 100% depreciation in the year you acquired the equipment has been dropped to only $20K, down from hundreds of thousands. If you buy something costing say $21,000 in the 24FY then it is back to the old rules of 15% depreciation in the first year and 30% every year after, so only $3,150 in depreciation in the 24FY. Let’s assume you operate a small business company, that’s a 25% tax rate, so only saving you $787.50 in tax. That’s right less than a grand on a $21K purchase.
Further, and perhaps more dangerous, if you are not prepared, is given so much of small businesses plant and equipment was depreciated 100% over the last couple of financial years, if you sell any item it is almost certainly going to cause a 100% profit. Sell a truck for $100K, that’s a $100k profit straight into the small businesses tax return.
A classic scenario might be a small business operating through a company buys a new truck for $100k and uses a trade in on an old truck of $80K to help buy it. This will cause the following tax result;
Tax depreciation on new truck $100K times 15% = $15k times the company tax rate of 25% is $3.75k tax saved
Tax profit on trade in of $80K = 25% on the $80K = $20K of tax to be paid
Net result $3.75K tax saved $20K tax triggered, net tax bill $16.25K.
Many people would be unwittingly expecting a $25K saving in tax being the 25% company tax rate on the $100K new truck.
This has the obvious potential to really catch out small business people especially those operating in the capital intensive industries like freight, farming, earth moving etc.
So in summary two key things to remember
1) Depreciation rates down on big $20K plus items to just 15% (used to be 100%)
2) Highly likely when you sell or trade equipment you bought last year or earlier the proceeds
will be 100% profit. Sell a ute for $30K, that’s a $30k profit for tax.
If you are unsure of how you are going to be affected call RWK accountancy on 97218 218 and ask to speak to one of our accountants.
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