The government’s small business budget has been a big success, it seems. It got positive headlines about the budget being stimulatory, and now some polls show the Prime Minister’s approval rating on the rise.

It’s a PR success. And a lot of that is due to attention lavished on the $20,000 tax write-off for small business.

It’s “phenomenal”, apparently.

Get ready for a lot more asset write-off announcements in future. Because they buy the government a lot more headlines than they deserve.

You wouldn’t know this from reading about it, but the “$20,000″ asset write-off is worth only about $1000.

Here’s why:

The $20,000 is not taken off the tax bill of a small business. Instead it’s a deduction from income — same as when an individual gives to charity. After a small business takes $20,000 off its income, it saves the 28.5% of tax it would have paid on it. 28.5% of $20,000 is $5700.

That’s the actual value of being able to instantly write off a car or machine from your tax this year.

But here’s the thing. Businesses could always write off asset purchases against their income. They just had to do it more slowly.

Using a depreciation schedule from the ATO website, I calculated how much a small business would have been able to save off its tax under the old rules.

It’s $5700.

The only advantage is that under the new policy, a business can claim all that $5700 in this tax year, instead of claiming it in dribs and drabs over the next decade.

Here’s a graph for how your depreciation works under instant write-off versus slow depreciation.

We can measure how much benefit instant access to the write-off provides. All we need to do is make an assumption about how small business values money over time. We do that with a discount rate. Let’s assume a discount rate of 8% (a hypothetical figure at the higher end of the realistic discount rate spectrum).

If that is the case, the net present value (NPV) of the flow of money is $4660. Only $1040 less than the value of the money right now.

(If you assume small business is even more patient, the value of the instant write-off is even less. At a 2% discount rate — a figure much lower than the average discount rate for small business — the NPV is $5350, and the net value of the new policy is a mere $350.)

In summary, the government is getting great value from this policy in media coverage terms.

Compare it to another tax break the Coalition gave small business in the budget — a 5% tax cut for unincorporated businesses. You probably haven’t seen mention of that anywhere.

But this 5% tax cut (full disclosure, I run an unincorporated business!) is worth even more to the budget bottom line. That’s it in the blue bubble on the right side — worth $1.8 billion. This graphic was in the glossy brochures journalists got in the budget lock-up.

It’s one of the most expensive measures in the budget. And it has barely got a headline. The government will not make that mistake again.

Expect asset write-off thresholds to be even higher in the next budget as governments seek a headline that says something like $100,000 Asset Tax Bonus for Small Business.

*This article was originally published at Jason Murphy’s blog, Thomas the Think Engine

Peter Fray

Get your first 12 weeks of Crikey for $12.

Without subscribers, Crikey can’t do what it does. Fortunately, our support base is growing.

Every day, Crikey aims to bring new and challenging insights into politics, business, national affairs, media and society. We lift up the rocks that other news media largely ignore. Without your support, more of those rocks – and the secrets beneath them — will remain lodged in the dirt.

Join today and get your first 12 weeks of Crikey for just $12.

 

Peter Fray
Editor-in-chief of Crikey

JOIN NOW