Small Business & General Business Tax Break

Under the newly legislated “Tax Break” concession (in the form of an investment allowance), an additional allowable deduction can be claimed by business taxpayers in the year in which a new eligible asset is installed ready for use, or money is spent on improving an existing asset.

What are the conditions?

The table below summarises the additional deduction percentage rates where the Tax Break can be claimed by either small business (taxpayers with an annual turnover less than $2million) or other business taxpayers, subject to all other conditions being met. 

It shows the minimum investment threshold for the cost of new eligible assets and the important dates for the investment commitment time and when the asset must be first used or installed ready for use.

So we can see, for example, that a small businesses entity can claim an additional tax deduction of 50 per cent of the cost of new eligible assets of $1,000 or more where it commits to investing (ie. enters the contract) in the asset between 13 December 2008 and 31 December 2009 and the asset is installed ready for use before 31 December 2010.

What is an eligible asset?

An eligible asset must be used principally in Australia for the principal purpose of carrying on a business.  The Tax Break will not be apportioned for any non-taxable use of the asset.

Assets eligible for the Tax Break are new tangible “depreciating assets” and new expenditure on existing assets used in carrying on a business for which a deduction is available under the Capital Allowances provisions.

A “depreciating asset” is an asset with a limited effective life and can reasonably be expected to decline in value over time.  However, this definition specifically excludes land, trading stock and intangible assets.

So where does that leave us?  In short, only tangible assets qualify for this relief and intangible or second-hand depreciating assets are strictly ineligible.

Special consideration for motor vehicles

The most relevant exception for the majority of taxpayers, relates to cars where the taxpayer claims car expense deductions using the 12 per cent method.  Although these taxpayers will still be ineligible for deductions under the Capital Allowances provisions, they may be entitled to the Tax Break subject to all other conditions being met.

Taxpayers cannot claim the Tax Break in an income year they use the cents per kilometre method.  However, this method can only be used for up to 5,000 business kilometres, which clearly implies a limited business use.

Although the Tax Break is calculated as a percentage of the investment amount in a new eligible asset, when luxury cars are being considered, the amount of the available Tax Break will be capped to the luxury car limit (ie. $57,180 in 2009).

Who can claim the additional deduction?

Only the “holder” of the new eligible asset may claim the Tax Break.  The holder is the entity which is typically eligible for the capital allowance deduction of the asset, under the Capital Allowances provisions.

It is important to note that there are a wide range of potential situations relevant to determining who the correct “holder” of an asset is.  Each may have different outcomes depending on the details of specific circumstances.

This especially applies where an eligible asset is going to be purchase by way of a lease arrangement, the question of who will be eligible for the Tax Break is an extremely complicated one and will always need to be considered on a case-by-case basis.

For that reason it is crucial to seek advice relating to your specific circumstances to ensure that your business will qualify as the holder and be eligible for the Tax Break.

The additional deduction is on top of the usual capital allowance deduction claimable for the asset as part of the taxpayer’s income tax return.  The deduction is claimable in the year in which the asset is installed ready for use.

Investment threshold: batches and sets of assets

The general rule states that the expenditure incurred in acquiring each discrete asset - or bringing the asset into its present condition – must exceed either $1,000 for small business taxpayers or $10,000 for other business taxpayers.

However, some flexibility in the provisions have been given for assets that “form a set” or are “identical or substantially identical” to be grouped when considering the relevant expenditure threshold.  Basically, items may be regarded as a set if they are dependent on each other, marketed as a set, or designed and intended to be used together.

Again, as with most tax rules, the devil is in the detail and whether an assets form part of a set will need to be determined on a case by case basis.

Preparing for Year End and Planning Ahead

Considering that year end is already upon us, and the 30 per cent additional deduction for other businesses will only be available where the business commits to investing in the asset by 30 June 2009 – some businesses will need to act fast.

If your business was considering making a significant capital investment within the next few years - it may be advantageous to bring those considerations forward and accelerate deductions for year end.

Given the complexities of the legislation and considering this article is only an overview, if you are considering making significant capital investment, we recommend you seek advice from your knp representative to ensure that your specific circumstances qualify for the Tax Break.

 Email your knp representative, knp@knp.com.au or call to make an appointment on +61 3 9824 8111.