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.

Which Australian state is most entrepreneurial? And is that a good thing?

Entrepreneurialism – it seems – is not about the wild frontier nor about libertarian values. The most entrepreneurial state in Australia is its most densely populated and most left-leaning (arguably).

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The data comes from the ABS series Business Entries and Exits. They show not only that Victoria has (slightly) more businesses per capita than anywhere else, but also that it is extending that lead.

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Is that surprising? Victoria is not only a wealthy state, which allows residents the opportunity to strike out on their own, it is also a beacon for immigrants, who often open small businesses. Also it has experienced a lot of structural change as manufacturing businesses close, forcing people to create new opportunities for themselves. 

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The beginning of a Bin Hire empire for Ben?

(Another point of note is how the ACT is a laggard for total number of businesses, but mid-pack when it comes to opening new businesses. I’m imagining a lot of senior public servants applying for an ABN as they prepare to lose their jobs and become consultants under the Abbott government.)

But historically, the ACT is the worst place to start a business. More than half of them disappear within a few years. In fact, Tasmania and SA, with their seeming reluctance to start businesses, are rewarded by having the highest four-year survival rates.

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The failure rate of small business is not a mainstream topic of conversation. But I can’t help imagining all the life savings that get flushed away, and all the relationships that fail when small businesses disappear.

 

It’s the hidden underbelly of capitalism, in a way. We focus on the big businesses that put people out of work, but in those cases, workers have none of their own capital involved and governments guarantee their benefits. When your local milk bar goes down or a removals company runs out of money, nobody notices but the proprietors. They’re not just looking for a new job. They are dealing with the death of their dream. But nobody comes to interview them about their plight.

Governments go ga-ga over small business, calling it the backbone of the economy, etc, etc. But they are risky. The data show you are much safer working for or investing in a business with more than 20 employees.

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But if you believe in yourself, the carrot is there. Last year, 27 businesses went from having no 1-4 employees to having over 200 in the space of one short year. It’s a bit like buying a Tattslotto ticket – it is unlikely, but just possible that you will have a very exciting result.

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Small Business: Saintly and Ascetic?

In the wake of the Commonwealth government’s decision to not provide $25 million to Coca-Cola Amatil to revamp the SPC canning facility in rural Victoria, a particular sort of argument about small business seems to have gained currency.

“If a small business person runs their business badly, they personally suffer… Coca-Cola wants the taxes of small business people to subsidise their business failure.” Ken Phillips argued in the Australian this week.

On ABC TV’s Q&A, Yolanda Vega said this:

“We seem to keep making the same mistakes. There’s these massive businesses that keep getting bailed out, and yet the small business of Australia which make up 96 per cent – are completely ignored.”

Among the people apparently so busy ignoring small business are Commonwealth Minister for Small Business Bruce BillsonVictorian Minister for Small Business Louise Asher, NSW Minister for Small Business Katrina HodgkinsonWA Minister for Small Business Joe FrancisSA Minister for Small Business Tom Kenyon, and Queensland Minister for Small Business Jann Stuckey, not to mention an array of shadow ministers and small business commissioners.

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The tax on interrogative punctuation hits yet another local enterprise

Governments want to help small businesses so much it hurts, even if they don’t always know how…

Victoria has a small business commissioner, promising help in creating a fair and competitive environment; and another entity called Small Business Victoria. The state puts on a small business festival; small business workshops and seminars; not to mention providing help for small businesses through Regional Development Victoria.

When Yolanda Vega said small businesses were “completely ignored,” she obviously hadn’t seen this recent press release from Victorian Small Business Minister Peter Crisp, where the government committed to buying in consultants for 500 Victorian businesses. 

As the source who brought this to my attention says, “What a joke.” This “scattering bread to the pigeons” approach to business welfare is uniquely formulated in terms of its capacity to not be helpful in any strategic sense.

The State government also spent $70,000 recently on a study tour of Europe, designed to figure out the smart ways to support small businesses. (Manchester, London, Amsterdam, Berlin – at least it wasn’t Cannes, Monaco, Sorrento, Santorini).

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Small business policy is wigging out

The federal government doesn’t want to be left behind either. Competition laws are being shaped to give small business a better run, and the government is funding a superannuation clearing house to reduce compliance costs for businesses with less than 20 staff. The ATO has recently launched an app for small businesses too.

I crossed paths with Small Business Minister Bruce Billson at a Real Estate agent in suburban Carnegie late last year. He was eager to cast everything the Abbott Government was doing, including removing the carbon tax, as a response to the needs of small business.

Small business account for ten percent of the tax take, but more than that in terms of votes. The idea they play under the same rules and fight on the exact same terms as big business is untrue.

No business is easy, but no business should be easy. Competitive markets should have business owners – whether they are shareholders in a major miner or baristas at a minor cafe – worried about the medium term future and working hard to secure it.

The help big business gets might be news-worthy and include big dollar figures, but the narrative that only small business represents some sort of Ayn Randian ideal of free enterprise should be quashed.