Government budget blowout as SMEs take advantage of $20,000 instant asset tax write-off

The federal government’s $20,000 instant asset tax write-off scheme for small businesses is proving to be more costly than expected, with Treasury figures indicating the scheme will cost the government an additional $370 million over the next two years.

Read more: SME $20,000 “instant” asset tax write-off explained

Fairfax reports the scheme, which was introduced in the 2015 federal budget, was originally forecast to cost the government $1650 million over the 2017 and 2018 financial years.

However, the governments Tax Expenditure Statement, released last week, shows the scheme will now cost $2020 million over the same period, an additional cost of $370 million.

The scheme, which allows businesses to immediately claim up to $20,000 in deductions for asset purchases instead of claiming the deductions over a number of years, is due to end on July 1, 2017, at which time the deductions threshold will revert to its previous level of $1000.

The figures from Treasury show that from the 2018-19 financial year, the revenue collected from this measure will outweigh the previous costs.

The government had estimated the accelerated depreciation measure would cost $150 million in 2018-19 but is now forecasting revenue collection from the scheme of $500 million in that year.

The government estimates the measure will cost $960 million over a five-year period, which comes in under the original budget of $1065 billion, and therefore represents an overall saving.

Figures released by small business minister Kelly O’Dwyer in December 2015 showed more than 99,000 small businesses made claims under the instant asset write-off scheme since July 1.

A total of $418.5 million was claimed under the scheme between July 1 and December 15, which compared to a total of $250 claimed against the scheme by 78,000 small businesses at the same time the year before.

An issue of timing

Maree Caulfield, director of taxation at MGI Adelaide, told SmartCompany this morning the increased costs to the government of the instant asset write-off scheme is “purely a timing thing”.

“There is a spike in cost now because people are able to claim deductions sooner than they otherwise would,” she says.

Caulfield says taking a long-term look at the depreciation measure, say over a period of 10 years, it is likely the scheme would not have any additional net cost to the government.

“While the budget does take a fair hit over the next two years, it probably does point towards the incentive having the desired affect of stimulating the sector and increasing confidence among small businesses,” she says.

“It’s a positive thing if these businesses have bought assets from other Australian businesses. There’s a positive side to it.”

Expenditure statement highlights where tax reform can occur

Caulfield says the Tax Expenditures Statement also reveals the areas of the tax system in which “real gains are to be generated” through tax reform.

The statement ranks the government’s tax expenditures in size, according to revenue foregone by the government

At the top of the list is the capital gains tax exemption for main residences, which including the discount component of the exemption, cost the government more than $45 billion in revenue forgone in the 2014-15 financial year.

Superannuation concessions are next in line, followed by exemptions to the goods and services tax for food. Also high on the list are capital gains discounts for individuals and trusts and GST exemptions for education, financial supplies and health services.

Caulfield says the list of large tax expenditures for the 2014-15 financial years is very similar to previous years, the difference is “now we have a government that is committed to tax reform”.

While she says the high cost of some of these measures does not automatically mean a government would move to abolish them, Caulfield says much of the conversation around tax reform has centred on reform in areas such as CGT discounts, superannuation concessions and the GST.