Small business is the lifeblood of our country, and the Federal Government is encouraging new investment to upgrade and expand business through a tax break called the ‘Investment Allowance’.
Originally announced by the Treasurer in December 2008, the Investment Allowance was expanded as part of the Government’s economic stimulus package in the 2009 Budget. This boost to businesses was due to end on 30 June 2009, however the deadline has since been extended to the end of the year.
Importantly, to take advantage of the Investment Allowance, orders must be placed by 31 December 2009 but delivery and installation need not happen until 31 December 2010.
What is the Investment Allowance?
The tax break, in the form of an Investment Allowance, provides small business entities with turnover of less than AUD$2 million a year an additional tax deduction of 50 per cent of the cost of eligible new tangible depreciating assets that cost more than AUD$1,000. The business would need to commit to investing in the asset between 13 December 2008 and 31 December 2009 and first use the asset, or install it ready for use, or (in the case of new investment in an existing asset) bring the asset to its modified or improved state, on or before 31 December 2010.
The tax break, in the form of an Investment Allowance, provides small business entities with turnover of less than AUD$2 million a year an additional tax deduction of 50 per cent of the cost of eligible new tangible depreciating assets that cost more than AUD$1,000
Business entities with turnover of AUD$2 million or more a year can receive an additional tax deduction of 30 per cent or 10 per cent of the cost of eligible new tangible depreciating assets that cost more than AUD$1,000. More information on the Investment Allowance for these businesses is available from the Australian Taxation Office website at: www.ato.gov.au.
Example: Make money in the first year
Depending on circumstances, it is possible to come out with a net gain in the first year of completing a tax return after making a purchase that takes advantage of the Investment Allowance. For example, Optom Pty. Ltd. has a turnover of less than AUD$2 million a year and Mr. Optom decides to take advantage of the investment allowance by purchasing new equipment valued at AUD$50,000 + GST. He does not have the funds available to purchase outright, so he decides to finance the purchase on a chattel loan over five years, and to have it fully paid at the end of the term.
At an interest rate of 7.5 per cent, the monthly repayments would be about AUD$996 (AUD$230 per week).
Deductions in year one:
- Investment Allowance AUD$25,000
- Depreciation (eight years useful life) – AUD$6,250
- Interest charges – AUD$3,100
- Potential deduction in year one – AUD$34,350
Assuming the tax rate for Optom Pty. Ltd. is 48.5 per cent and that GST is paid and reclaimed, the potential deduction from this purchase in year one would be AUD$16,660. This compares to repayments in the first year of AUD$11,952, resulting in a net gain of AUD$4,708 for this period.
How much could you save?
Of course, these figures above are illustrative only, and we recommend that you seek tax advice regarding your specific circumstances. Please note that the Investment Allowance is applicable only in year one, and that depreciation and interest charges will decrease after year one.
Some other examples include:
- For equipment worth AUD$100,000, a small business could receive an additional tax deduction of AUD$50,000 on top of the AUD$15,000 depreciation they would already claim – adding up to a AUD$65,000 tax deduction in the first year.
- For a motor vehicle worth AUD$50,000 on a five-year chattel mortgage, a small business could receive an extra tax deduction of AUD$15,000 in addition to the normal depreciation.
Act before time runs out
Many smart small business operators are currently planning and preparing their orders to secure the 50 per cent tax break for their business, but if you leave things to the last minute you run the risk of missing out on what may be a cash handout as shown in the example above.
Importantly, you do not need to have the funds and make an outright purchase; you can finance the acquisition of the asset through a chattel mortgage or asset purchase agreement and still be eligible for the Investment Allowance.
Choose the right finance
Both a chattel mortgage and asset purchase agreement allow the end user, as opposed to the financier, to be legal owner of the asset, meaning that interest and depreciation – and the Investment Allowance – can be claimed as an expense for tax and accounting purposes.
Whether you choose to finance using a chattel mortgage or asset purchase agreement will depend on the after-tax cost of the finance, and your accountant or tax adviser can help you decide which is best suited to your circumstances.
However, you must remember that a financing arrangement must be entered into by 31 December 2009 to qualify for the Investment Allowance; it is not sufficient to only have completed an order with a supplier.
|Frequently Asked Questions|
In what period can I claim my eligible asset purchases?
You can claim for eligible purchases made after 13 December 2009 to 31 December 2009 that you start to use or have installed ready for use by 31 December 2010. Note that the payment date does not affect your claim; only the contract date and usage dates are relevant.
How much do I need to spend to qualify for the tax deduction?
The minimum spend on a depreciating asset for a business with an assessable income of less than AUD$2 million is AUD$1,000. For a business with assessable income of more than AUD$2 million, the minimum spend on a depreciating asset is AUD$10,000.
What assets qualify?
Only new depreciating assets qualify.
What does not qualify?
The tax break is not available for:
Can I finance my purchase?
Yes, chattel finance and hire purchase enable you to claim the tax break directly.
How is assessable income determined?
It is based on the prior tax year and adjusted for the current year. How do I make the tax claim? The allowance will take the form of an additional income tax deduction in the business income tax return for the year in which the plant or equipment is installed ready for use.
Andre Karney is a professional finance advisor from Investec Experien. He has over 20 years experience in banking and finance. Andre’s specialist expertise in the health care sector and in-depth knowledge of finance ensures a strong ability to understand and fulfill the finance needs of clients.
Investec Experien are dedicated to the medical, optical and dental professions, and is the preferred financier of several key health care industry associations, including the AMA in NSW, Victoria, Queensland and Western Australia. They work closely with these associations to develop leading finance and investment products that are suited to the particular needs of members. Contact Investec Experien on (AUS) 1300 131 141 or by email: email@example.com
The material in this document is general commentary only and is based on information that we believe to be reliable. None of the material is, or should be, regarded as advice. Accordingly, no person should rely on any of the contents of this editorial without first obtaining specific advice from their own accounting or tax adviser. All finance is subject to Investec Experien’s credit assessment criteria. Terms and conditions, and fees and charges apply. Examples in this editorial are used for illustrative purposes only.