Instant asset write-off is a government initiative that allows certain assets purchased prior to 30 June 2022 to be expensed in the year they are purchased rather than be depreciated over a number of years, creating a significant tax advantage.² While it is a once-in-a-lifetime opportunity to gain these deductions by purchasing capital equipment, a thorough review of your proposed investment and preparation of a capital budget is essential.
To assist in review:
1. Identify relevant opportunities that are consistent with your business strategy. It may be innovation, capital replacement, or to improve productivity and efficiency.
There is no value in spending money purely to obtain a tax benefit, considering instant asset write-off means that any sale proceeds will be 100% taxable.
A brilliant idea for one business may be the worst decision for your business. Spare capacity may be considered an investment, however, it is often something you paid for and did not use.
2. Be Informed
It may appear to be an excellent initiative and cost-saving, but a detailed review involving the whole value chain could uncover
key costs or considerations that were initially overlooked. Take the time to do your research.
Consider: French train operator SNCF had 2,000 state-of-the-art trains custom-built at the cost of €15 billion, only to find the network they were responsible for had 1,200 platforms that were too narrow for the trains.
3. Identify and Evaluate.
Capital projects/ purchases usually involve significant cash outlays, which are recouped over time. To assess the viability of a project, review alternatives and ensure the full purchase costs are identified. As per point 2, all factors are to be considered, not only the capital costs of the purchase price and building changes, but business interruption costs, impact on other areas of the business, and retraining required. Then forecast all potential cashflows considering alternatives.
From a financial aspect, use one of the capital budgeting methods: Net Present Value NPV, Internal Rate of Return IRR, or Payback method. The easiest to quickly calculate is the payback method; considering the expected future cash flows, and how long will it take to repay the initial investment.
4. Make and implement the decision
Once all alternatives are considered, and the decision is made to proceed, secure funding and make the investment. Revisit all factors identified in the value chain review, including supplier capacity, installation, commissioning, training, system and process changes, and ongoing servicing.
Use the funding process to review the wisdom of the investment, consider overall indebtedness, set aside the taxation savings. Is the investment sound? Can you afford this decision, or can you afford not to make this decision?
5. Evaluate performance and learn
Track realized cash flows and verify predictions made. Use the information to revise plans and communicate learns to the team to refine capital review for the future.
If the decisions made were good and profitable, or poor and costly: have the humility and courage to analyse and, as an organization, own it and learn why.
1 Five stages of capital budgeting adapted from Horngren; Cost Accounting a managerial emphasis 2009 pg 706,707
2 Refer Pg. 5 Jan/Feb UBTA Bulletin for more details of the Scheme