Does Wayne Swan understand how his ‘instant asset write off’ actually works?

Does Wayne Swan understand how his ‘instant asset write off’ actually works?

In an exchange in question time today, it became painfully apparent that Wayne Swan doesn’t understand what an ‘instant asset write off’ is and how it works.

First, a bit of background.   Labor has been trumpeting for months its policy of offering small businesses an instant asset write off of up to $6500.

To understand how this works, imagine a company earns a profit of $100,000.  Companies pay tax on their taxable income – which in broad terms is the same as their profit - at 30 per cent.  So if this company did not have any deductions, its taxable income would be $100,000 and its tax would be $30,000.

But if it bought an asset, such as a computer system worth $6,500, this would be an asset of the business.  Under the normal tax rules, you are allowed to claim a deduction each year for depreciation – that is, the loss in value of the asset.  If the computer system were depreciated on a straight line basis over five years, its value would drop each year by $1300 and this would be an allowable deduction.  Hence, the company’s taxable income would reduce to $98,700 and its tax would reduce to $29,610 – a saving of $390.

Labor’s policy is to grant an instant asset write off of up to $6,500.  This means that the company, upon buying this asset, can write off the entire value in one year.  So in the example given above, rather than deducting $1300 in year one, the company would deduct $6500 in year one.  Its taxable income would reduce to $93,500 and its tax would reduce to $28,050 - a saving of $1950.  So in this first year, the company would be better off by $1560 than if the normal rules applied.

Wayne Swan has been going around claiming that the value of the benefit to a business is $6500.  In fact, as the example above shows, it is much less than that even in the first year.

But there is a nasty sting in the tail for a business which takes the instant asset write off.  Assume that the company’s profits in years 2,3,4 and 5 were also $100,000 in each year, before any deductions.  Normally, the business would have been able to claim a deduction each year of $1300 and hence saving $390 in tax.  But once the business takes advantage of the instant asset write off, it can’t have any more deductions in respect of the asset (because its value has already been written down to zero.)  Hence, across years 2 to 5, the company will be worse off by $1560 in total – which exactly equals the amount by which it is better off in year 1.  The only real benefit it gets is the timing advantage – which will be a tiny fraction of the $6500 number constantly cited by Wayne Swan.

Now, have a look at the exchange in Parliament today, following a very shrewd question by Opposition Finance Spokesman Andrew Robb – and ask yourself whether Wayne Swan even understood the point that Andrew was making.  It looks to me as if he did not have the first clue what Andrew was talking about – and given that he is the Treasurer of Australia, that is very, very worrying.

Mr ROBB (Goldstein) (14:59):  My question is to the Treasurer. Treasurer, if a small business paying the company tax rate purchases a new ute worth $35,000 after one July this year, won’t the first year after-tax benefit from the government's instant asset write-off arrangements be $1,300, not the $6½ thousand dollars that the government was claiming yesterday?

Mr SWAN (Lilley—Deputy Prime Minister and Treasurer) (15:00):  I will restrain myself, Mr Speaker. I will just have to go back and run through some of the facts. We have a $6500 instant asset write-off, which can be claimed by up to 2.7 million small businesses. That will be a very substantial benefit, particularly to the cash flow of many struggling businesses right around our country. In the last budget, we did say that the first $5,000 of any car purchase—namely, a ute—could be written off within that framework. That is what we have said, so I have not got the faintest idea what he is talking about yet again.

Mr ROBB (Goldstein) (15:01):  I have a supplementary question, Mr Speaker. Will the Treasurer confirm that any first year tax benefit will be offset by higher tax liabilities in subsequent years so that the net value to the business of the instant asset write-off over the life of the asset is likely to be about $300, not by $6½ thousand dollars that the government was claiming yesterday?

Mr SWAN (Lilley—Deputy Prime Minister and Treasurer) (15:01):  This is a fundamental reform because we are removing—

Opposition members interjecting—

Mr SWAN:  It just shows that you do not get it.

The SPEAKER:  The Treasurer will be heard in complete silence for the answer to the supplementary question.

Mr SWAN:  This is one of the most fundamental reforms that we could make to the tax system for small business. It has a very substantial benefit in terms of cash flow in the year that is claimed and it also simplifies the system because it does away with complex depreciation schedules. So this has really been welcomed by small business. This is one of the recommendations of the Henry review, and we are doing it in an affordable way.

Mr Van Manen interjecting—

The SPEAKER:  The honourable member for Ford will remove himself from the chamber under the provisions of standing order 94 (a).

The member for Forde then left the chamber.

Mr SWAN:  Those opposite are acutely embarrassed by the fact that they had voted against this measure both in the House of Representatives and in the Senate because it brings the benefits that I was talking about before.