Make the most of the Investment Boost

Every year at least one client will call up shortly before the end of March and say something like, “If I buy a new excavator before the 31^st, will I save tax this year?” 

Until recently, my answer has generally been, “Not much, so don’t rush off and make any snap purchases just to try and beat this deadline.” 

However, recent changes to the tax rules, called “Investment Boost” now make this type of purchase a better proposition. The Investment Boost allows an immediate 20% tax deduction for asset purchases. The remaining 80% of the asset can still be depreciated throughout the life of the asset. Previously, the only tax deduction available for asset purchases has been via depreciation.  

The idea behind the policy is to encourage business investment, which might in turn help the country battle its way out of the current economic slump.  

Let’s use an example to compare an asset purchase under the old and new rules.  We will use the same example, being a $100,000 excavator purchased on the 15^th of March.  

The old rules 

When the excavator is purchased, it is added to the asset register and depreciation begins. In this case, there will be 16 days of depreciation at the relevant depreciation rate. For excavators, the Straight-Line depreciation rate is 8.5%, giving a depreciation deduction of $373 in this first financial year. This will result in a very minor reduction in profit and tax.  

Asset Cost	$100,000
Depreciation Rate (Straight-Line)	8.5%
Depreciation per year	$8,500
Depreciation per day	$23
Number of days depreciated	16
Deduction allowed	$ 373

The new rules 

With Investment Boost, an immediate 20% deduction is allowed in the first financial year, resulting in a substantial $20,000 deduction.  

Asset Cost	$100,000
Investment Boost deduction	20%
Deduction allowed	$20,000

New or imported assets only 

One aspect of this policy that is bound to trip some people up is that the Investment Boost only applies to assets that are ‘new or new to New Zealand’, meaning second-hand assets are not eligible, unless they are imported. This is a pity as there are many trade business owners who prefer to buy quality used rather than new machinery.  

Overall, the Investment Boost policy is a worthwhile change to the tax rules and could help your business, especially if you have had a profitable year and are looking for ways to reduce your tax while also upgrading your assets.