Investment Tax Break - What Your Business Needs to Know
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The Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 implementing the incentive for business to invest in new assets was passed by both Houses of Parliament as of 14 May 2009 and received Royal Assent on 22 May 2009. The Bill applies retrospectively from 13 December 2008.
With the tax break measures now law, businesses should seriously re-consider any plans they may have had to defer capital expenditure given the introduction of the temporary tax break measures which are designed to assist Australian businesses invest in acquiring new, or upgrading existing, tangible depreciating assets.
Further, in order to claim the tax break in their 2009 year income tax return, businesses must act now as the asset must be used or installed ready for use in their business by 30 June 2009. Failure to meet this requirement will mean the tax break is deferred until the 2010 or 2011 income tax return.
What is the tax break?
The tax break is a one-off bonus tax deduction of either 50%, 30% or 10% of the cost of acquiring a new asset or the cost of upgrading an existing asset. The bonus tax deduction is in addition to the usual depreciation deductions available under the capital allowance regime. This means that, over time, a small business taxpayer could effectively claim deductions of up to 150 per cent of the asset's value (or 130% for non-small businesses).
The investment allowance as originally announced gave a tax break of either 30% or 10%. However, the Government announced in the Federal Budget handed down on 12 May 2009 that the 30% tax break will be increased to 50% for asset purchases made between 13 December 2008 and 31 December 2009 by small businesses (i.e. businesses with turnover of less than $2m). This is a special tax concession aimed at specifically stimulating capital expenditure by small businesses.
The following tables outline the key dates relating to the different rates at which the tax break could be claimed for businesses.
Small business entities
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Installed by: |
New investment by: |
| 31 December 2009 | |
| 30 June 2009 | 50% in 2008 - 09 |
| 30 June 2010 | 50% in 2009 - 10 |
| 31 December 2010 | 50% in 2010 - 11 |
All other businesses
|
Installed by: |
New investment by: |
|
| 30 June 2009 | 31 December 2009 | |
| 30 June 2009 | 30% in 2008 - 09 | |
| 30 June 2010 | 30% in 2009 - 10 | 10% in 2009 - 10 |
| 31 December 2010 | 10% in 2010 - 11 | 10% in 2010 - 11 |
How do I qualify for the tax break?
Small business entities
To qualify for the 50% tax break, a business must:
- commit to investing in a new 'eligible' asset between 13 December 2008 and 31 December 2009; and
- first start to use the asset or have it installed ready for use by 31 December 2010; and
- be a 'small business' (i.e. a business that either has aggregated turnover for the previous year of less than $2m, aggregated turnover for the current year that is likely to be less than $2m, or aggregated turnover as worked out at year end which is less than $2m).
All other businesses
To qualify for the 30% tax break, a business must:
- commit to investing in a new 'eligible' asset between 13 December 2008 and 30 June 2009; and
- first start to use the asset or have it installed ready for use by 30 June 2010.
To qualify for the 10% tax break, a business must:
- commit to investing in a new 'eligible' asset by 31 December 2009; and
- first start to use the asset or have it installed ready for use by 31 December 2010.
Example
On 28 May 2009, Robert ( a small business taxpayer) enters into a contract to purchase an item of plant at a total cost of $110,000 (GST Inclusive) and with an effective life of 5 years. The item of plant is installed ready for use on 1 July 2009.
When Robert lodges his 2009 - 10 income tax return, he will be able to claim a deduction of $70,000 in respect of the new plant purchased i.e. the first depreciation deduction of $20,000 ($100,000/5) calculated under the normal depreciation rules and the tax break of $50,000 ($100,000 x 0.5).
If we assume that Robert is on the top marginal rate of 46.5% including Medicare Levy the tax break will result in a tax saving to Robert of $23,250 i.e. $50,000 x 46.5%.
Therefore, the real cost of purchasing the item of plant will be:
Cost of Plant $ 110,000
Less: GST Refund $ (10,000)
Less: Tax Break Saving $ (23,250)
Net Cost before Depreciation $ 76,750
Robert may also get the benefit of tax savings on normal depreciation on the plant over 5 years of $46,500 assuming he holds the plant for the 5 year period and his marginal tax rate remains at 46.5%
This could mean the real cost of the plant to Robert is reduced to $30,250!
What is an eligible asset?
- the asset must be new; and
- the asset must be used principally in carrying on a business in Australia; and
- each individual asset must cost a minimum of $10,000 or alternatively $1,000 for small businesses.
Note that multiple investments in the same individual asset may also be aggregated to meet the threshold. Also, once the investment threshold has been met a business may claim the tax break on subsequent investments in the asset (they need not be acquired in the same transaction or in the same income year).
The following table lists the kinds of assets that are not eligible for the tax break and those that may be eligible, subject to all of the other criteria being satisfied.
| Eligible | Not eligible |
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What is a 'new' asset for the purpose of the tax break?
A new asset is one that has not been previously used anywhere, by anyone, for any purpose except where it has only been used for reasonable testing and trialling. This means that second-hand assets, even if they are new to your business or imported from overseas, do not qualify for the tax break.
What if I finance the asset purchase?
Whether or not you can claim the tax break on financed assets comes down to who the law defines as 'holding' the asset. Generally speaking, equipment purchased under a loan, hire purchase or chattel mortgage will be eligible for the tax break. Leased assets will not be eligible for the bonus deduction.
Will the tax break be reduced for any non-taxable use of the asset?
Unlike normal depreciation deductions under Division 40, the tax break will not be reduced for any non-taxable use of the asset or apportioned based on the actual taxable use of the asset over a particular income year. This approach improves certainty for taxpayers.
However, if you are the entity claiming the tax break, you must be able to demonstrate that at the time you started to use the asset, or had it installed ready for use, it was reasonable to conclude that you will use the asset principally in Australia for the principal purpose of carrying on your business.
There is a great deal of uncertainty around what is meant by 'principle purpose' especially in relation to eligibility of cars for the tax break where the car is not used 100% for business purposes.
Unfortunately, the Explanatory Memorandum to the Bill does not expand on what is meant by principal purpose of carrying on your business.
However, the general view is that in order for a car to be considered principally used for the purpose of carrying on a taxpayer's business, the business usage of the car should be greater than 50%. However, we await further authoritative guidance from the ATO on this.
Further Information
To keep informed of the latest development and ensure you take advantage of the increased tax deductions, talk to Cutcher & Neale prior to making your next asset purchase.