The real value of the government’s “phenomenal” $20k asset write off

The government’s small business budget has been a big success, it seems. They got positive headlines about the Budget being stimulatory, and now approval ratings of the PM are back up.

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 $20k off their income, they save the 28.5 per cent tax they would have paid on it. 28.5% of 20k 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 their 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.

Years since purchase on the horizontal axis.
Years since purchase on the horizontal axis.

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. Lets assume a discount rate of 8 per cent.

If that is the case, the net present value 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 per cent discount rate 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 they gave small business in the Budget – a five per cent tax cut for unincorporated businesses. You probably haven’t seen mention of that anywhere.

But this five per cent 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.

budget glossy

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.

Parental leave changes will hurt more than the Government believes

The government offers new parents 18 weeks parental leave paid at the minimum wage. It’s worth $11,500. Until now that policy was available to everyone. But the government will now retract the offer for people whose jobs offer them parental leave.

I can see the attraction of cutting it, to save $1 billion. And I don’t expect vast waves of public sympathy for the kind of people who have good employer parental leave schemes. These people are wealthier and well-attached to the labour force.

“At the moment people … are effectively double dipping — we are going to stop that,” – Treasurer Joe Hockey.

But the “double dipping” terminology is partly responsible for the positive initial reaction to this announcement. I was surprised to see even the redoubtable Peter Martin using that terminology in his report on the policy this morning.

Looking at it like that is insufficient. The question is complex. How to take away government services as the private sector provides them is one of the trickiest parts of any policy sphere.

In some policy areas, no matter your private endowments, the government provides. Public transport is available to people whether or not they own cars. Medicare is universal – even those with private health insurance can use it.People with Foxtel are still able to tune into the ABC. Public schools are not reserved for those who can’t afford private ones, etc.

In other areas, we means-test things tightly. Welfare payments are removed as quickly as possible as people earn more money, even though that creates high effective marginal tax rates.  (There is a strong movement arguing for a “basic income” which would effectively be a universal and non means-tested welfare payment).

In each of these cases, a range of questions comes to bear. Is the offering in question a universal right, or a safety net? Is it very expensive to provide widely without means-testing? Is it advantageous to have public and private provision alongside each other? And what will be the effect on private sector provision if the government means-tests?

This last point is crucial in this case.

If you work for a university like the Australian Catholic University that offers 52 weeks paid leave, your employer might not see the new policy arrangements as competitive. The government’s 18 weeks at minimum wage is no substitute. But the average duration of paid parental leave in Australia is under 10 weeks.

For most companies, I expect they will see that their expensive-to-provide policies are offering little or no net benefit to their employees, so they will have no reason not to cancel them.

This policy might actually provide savings to employers, but it will lead to a real fall in the amount of paid time new parents can spend with their children.

Instead of drawing on both, parents will then draw on only the government scheme and there will therefore be a drop in the amount of parental leave taken.

Faced with this shorter period of parental leave, parents will then choose whether to return to work. It could even cause some new parents to sever their connection to the workforce. The consequences could be further reaching than they seem.