Why small business needs an investment allowance

An investment allowance would help SMEs buy income-producing assets

The Council of Small Business of Australia and the Commercial Asset Finance Brokers Association agree with the federal government and opposition that small business needs an incentive to assist with business activities.

One incentive should be in the form of an investment allowance.

What is an investment allowance?

A business investment allowance is a common tool used by governments for economic stimulus. It is an additional tax deduction available for the purchase of plant, equipment and vehicles and encourages business people to invest in income-producing business assets.

The most recent version of an investment allowance in Australia was introduced under the previous federal Labor government as part of a temporary package to limit the impact of the global financial crisis.

That investment allowance was set at 50% of the asset cost. 

Normally, for example, a cabinet-maker may purchase a new milling machine for $25,000 which would be depreciated over five years with the need for depreciation schedules to accompany tax returns. 

But under an investment allowance there would be an additional and immediate write-off of $12,500 (50%) plus normal depreciation over time. This ultimately provides a tax deduction of 150% and rewards businesses who invest in their own future and that of their employees.

The benefits of an investment allowance

The broader benefits of this type of tax advantage are various:

1. An increase in purchases across the economy

There are some 2.1 million small businesses in Australia and the more of them that are purchasing goods the greater the movement of cash through the economy and the better business returns.

2. An increase in business lending 

Equipment purchased under a chattel mortgage is still eligible for the investment allowance without the business having to make the full capital outlay. This additional equipment either saves outsourcing costs or boosts throughput capacity, effectively creating the cash-flow to pay for itself.

3. A positive impact on employment

Reduced company tax allows employers to allocate funds towards employment, and there will be an increase in revenue for the government from PAYG from the extra people employed.

4. Increase in confidence in the small business community

Measuring the effect of confidence on an economy is something for the academics but we in the world of business know that an increase in confidence will seed an increase in business activity. Small business people are nothing if not optimistic and trusting people, otherwise we wouldn’t go into business (pessimists are normally economic rationalists or big business advisors). But if that optimism is blunted by poor economic activity or trash talking from politicians or perhaps bad economic news from overseas then we need to do something about that. 

Firstly politicians should provide facts, good and bad, and then respond to that with support and assistance as needed. An investment allowance should be part of that support.

What a new investment allowance could look like

This is what a new investment allowance could look like for businesses with a turnover less than $5 million:

• Additional 50% tax deduction available for capital purchases
• Eligible assets must be tangible and depreciable
• Commitment to invest must be made between certain dates (say between 1 July 2015 and 30 June 2017)
• Eligible assets must be installed and ready for use by a certain date (say 30 June 2018)
• Eligible assets must cost between $1,000 and $2,000,000 (excluding GST)

The previous investment allowance only applied to new (or demonstrator) plant, equipment and vehicles.  However, we believe any new allowance should apply to both new and used plant, equipment and vehicles; as used assets are usually purchased from within Australia and the money stays here. An allowance that applies only to new assets could result in offshore purchases and could seriously disadvantage local second-hand machinery sales. 

This form of temporary investment allowance is an additional tax deduction, which is easily quantifiable and has immediate effect. We believe it will have a greater incentive value than a small reduction in company tax, which is difficult to quantify and has far less impact on day to day operations.

Peter Strong is the chief executive of COSBOA and David Gandolfo is a director of COSBOA, director of CAFBA and director of Quantum Business Finance.