Asset purchasing

ASSET PURCHASING Tax specialist Brett Crombie explains why now is a good time to buy new assets.

Knowing about the temporary Threshold Value change could reduce your tax bill.

In late March, as COVID-19 first swept through New Zealand, the government responded by passing several pieces of legislation aimed at keeping the economy afloat. Tucked in amongst the higher profile responses, such as the wage subsidy and mortgage deferral schemes, was another law called the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020.

This Act contained a change to what is known as the Threshold Value.

What has changed? In general accounting terms, when an asset is purchased, it is recorded at its cost price and depreciated over its useful life, usually several years. This depreciation is indeed a tax deduction, but the deduction is spread out across the life of the asset.

For many years there has been a notable exception to this rule, involving the Threshold Value. Assets valued at or below the Threshold Value can be fully depreciated in the year they were purchased. This is an advantage for a business because higher tax deductions result in a lower year-end tax bill. For the past 15 years, this Threshold Value has been $500.

The COVID-19 Response Act has made changes to this Threshold Value. For items purchased between 17 March 2020 and 16 March 2021, the Threshold Value has increased to $5,000. From 17 March 2021 the Threshold Value drops to $1,000.

What to do now? To maximise the tax advantage, consider making asset purchases in the $1,000 to $5,000 range between now and 16 March 2021. For example, buy a new toolkit for $5,000 by 16 March 2021 and you will get the 100% tax deduction against your 2021 Income Tax. Buy it on or after 17 March 2021 and the full deduction will not be allowed.

About the author: Brett Crombie is a Chartered Accountant, qualified lawyer and former Inland Revenue tax investigator. He is the owner of Straightedge Accounting, which provides tax, accounting and business advisory services. Contact Brett on 021 301 022 or email brett.crombie@straightedge.nz