COVID-19 and low-value assets; Potential tax savings for your business

In late March, as Covid-19 swept through New Zealand, the government did several things to keep the economy afloat. The Wage Subsidy Scheme received the most attention, with the lump sum payment to qualifying employers a centrepiece of the government’s economic response.


There was however another piece of legislation that was passed on 25 March, rather awkwardly titled the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (the COVID-19 Response Act).


This Act contains some interesting tax changes that business owners should take note of. The one I’ll talk about today is the low-value asset threshold.


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 a concept called ‘Threshold Value’. Section EE 38 of the Income Tax Act 2007 is where the action happens. The section allows items valued at or below the Threshold Value to be fully depreciated in the year they were purchased. This is an advantage for a business owner because higher tax deductions result in a lower year-end tax bill. For about the past 15 years this ‘Threshold Value’ has been $500.


Which brings us back to changes made by the COVID-19 Response Act. This Act has made changes to this Threshold Value. Most notably, for items purchased between 17 March 2020 and 16 March 2021, the Threshold Value has increased to $5,000. After 16 March 2021 the Threshold Value drops to $1,000.


What to do about it?

If you’re a business owner, you could benefit from this temporary tax measure by making asset purchases in the $1,000 to $5,000 range between now and 16 March 2021. For example, buy a new Farm Bike for $5,000 by 16 March 2021 and you’ll get the 100% tax deduction against your 2021 Income Tax. Buy it on 17 March 2021 and you won’t.


It’s well worth thinking this over as part of your next business strategy session with your accountant. Ideally, start thinking about it sooner rather than later, to avoid any rushed decisions next March. If you’re after more information on how this or other recent tax changes could affect your business, feel free to get in touch with me at brett.crombie@straightedge.nz