If you are a business that has or is thinking of taking advantage of the instant asset write-off, you need to be mindful of the effects this will have on your bottom line over the next 12 – 24 months.
The total cost of eligible capital depreciable assets may be written off in the first year of use rather than at the usual depreciation rate over the asset’s life. While the benefit is that it results in a reduced NP position and, therefore, less tax, the reduction in NP may mean you breach the Bank’s financial covenants.
Without sufficient bandwidth, you may breach a covenant or put yourself under too much pressure. That is, the accelerated write off may impact a financial covenant such as a dividend policy/covenant where it is calculated pre-tax versus after tax.
Why does this make a difference? Well, if there is a “Dividend Restriction” covenant, it can make a big difference.
For example, let’s say the covenant is “Dividends, distributions are restricted to 30% of NPAT”. If you’ve applied accelerated Asset Write off and dramatically reduced your NPAT position, this could potentially reduce the amount you can draw by way of dividend.
Therefore, before purchasing significant assets, speak to your trusted accountant or tax professional to determine how it will impact your cash flow and finances in the short term.
It’s important to note that there are subtle differences amongst banks, so it’s vital that you, as the client, are aware of these and be mindful of the covenants you agree to.
