Prior to 17 March 2020, if an asset was purchased that cost more than $500, the asset was capitalized, and no immediate tax deduction was available. Depreciation (the write down of the asset over the assets life, calculated at a specific rate set by the IRD) was allowed as a tax-deduction each year. Any asset below the $500 threshold was able to be claimed as a deduction in full.
When the Covid-19 pandemic arrived, the government responded by temporarily increasing the low value asset threshold from $500 to $5,000 for assets purchased on and after 17 March 2020. This means that any asset purchased on or after 17 March 2020 that cost up to $5,000 can be claimed as a full deduction in the year it is purchased. This change was implemented to encourage spending into the local economy throughout Covid-19.
The low value asset cost threshold increases from $500 to $5,000 is only available up to 16 March 2021. After this date, the threshold value will return to $1,000 (an increase from the original threshold of $500).
Should you purchase a fixed asset up to the value of $5,000 now, to take advantage of the full deduction?
If you were thinking of replacing an asset in the short term (next few months), then it is worth considering taking advantage of the $5,000 threshold while it is still available up to 16 March 2021.
However, you always need to ask yourself the question; is it worth spending $1 to save yourself a maximum of $0.33 (the top tax rate)?
For every $1 you spend (up to $5,000) you save $0.33, so if you purchase an asset that costs you $5,000, you save a maximum of $1,650.
If the asset is not required to operate your business and/or you do not need the asset immediately, then it may be better not to buy it (and save yourself the $5,000 cost in the first place).
There are also other factors we recommend considering:
Does the asset cost $1,000 or less? If so, you can wait until after 16 March 2021 and still receive a full tax deduction on the cost value.
What is your year to date or expected full year profit? If you are making a loss for the year, it’s unlikely there will be any tax advantage in the current financial year.
Some assets like computers, smart phones and power tools have high deprecation rates (67%), so the tax saving may be minimal.
If you are unsure about the decision to purchase a new asset before 16 March 2021 or not, please contact our office and can work through this decision with you.
Contact Tim Doyle or Jane Evans today to discuss your business continuity planning needs (or any other matter) on 07 823 4980 or contact us. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.