New temporary investment allowance – time is short

The Government’s announcement earlier this year of a new 30% temporary investment allowance for businesses has great potential, but because it is not yet law, many SMEs may be reluctant to commit funds to purchasing new equipment that will qualify.

The problem is that time is short – to qualify for the 30% deduction, an SME must commit to investing in the asset between 13 December 2008 and 30 June 2009.

The new deduction was introduced in Federal Parliament on 19 March 2009 in the Tax Laws Amendment (Small Business and General Business Tax Break) bill 2009 – but that bill is still in the House of Representatives. Parliament resumes on 12 May 2009, and it is hoped that, given the aim of the bill, its passage will be a priority.

Key details

I have discussed the new deduction previously, but here is a reminder of the key details:

• The deduction is limited to new tangible, depreciating assets for which a deduction is available under the tax law and new investment in existing assets. An asset is new if it has never been used or installed ready for use by anyone, anywhere.
• Second-hand assets are not eligible for the deduction, and nor is software.
• New investment in relation to an asset (usually the asset’s GST-exclusive cost) needs to exceed a certain threshold before it can qualify for the deduction. The new investment threshold is $1000 for small business entities and $10,000 for all other taxpayers.
• The asset must be used principally in Australia for the principal purpose of carrying on a business.

Generally, the new investment threshold needs to be met for each individual asset. However, multiple investments in an individual asset may be amalgamated in meeting the new investment threshold.

The deduction is worked out using a rate of either 30% or 10%, depending on when the taxpayer committed to investing in the asset. The deduction can be claimed in the income year that the asset is first used or installed ready for use. The deduction will not be apportioned for any non-taxable use of the asset.

A taxpayer must make a decision to invest either in a new asset or an existing asset between 13 December 2008 and 31 December 2009. Assets that a taxpayer held or entered into a contract to hold on or before 12 December 2008 will not qualify. However, additional investment in such assets undertaken from 13 December 2008 may be eligible for the deduction.

To qualify for the 30% deduction, a taxpayer must:

• Commit to investing in the asset between 13 December 2008 and 30 June 2009.
• First start to use the asset or have it installed 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 30 June 2010.

To qualify for the 10% deduction, a taxpayer must:

• Commit to investing in the asset by 31 December 2009.

• First start to use the asset or have it installed ready for use, or bring the asset to its modified or improved state on or before 31 December 2010.

Other points to note

Deadlines – While the date of 30 June 2009 is important, it should also be remembered that if an SME cannot meet the 30 June 2009 deadline, it may still be entitled to a bonus deduction of 10% of the cost of an eligible asset if it contracts for, or starts to construct, after this date and before 31 December 2009, provided it starts to use or have the asset installed ready for use by 31 December 2010.

A bonus – Don’t forget that the deduction will provide a bonus deduction. It has no impact on deductions for an asset’s decline in value claimed under other provisions of the tax law, for example, division 40 of the Income Tax Assessment Act 1997. This means that, over time, a taxpayer could effectively claim deductions of up to 130% of the asset’s value. Your accountant should be able to advise on this.

Cars – Generally, cars used in a business qualify as assets that can be eligible for the deduction. However, determining whether the business can claim the deduction depends on the method used by the business to work out deductions for car expenses. An SME that uses the “one third of actual expenses” and “log book” methods for claiming car expenses may be eligible for the deduction. Demonstrator vehicles can qualify as “new assets” provided they have only been used for reasonable testing and trialling.

Can add to a tax loss – The new temporary investment allowance provides a bonus tax deduction; it is not a rebate or a refundable tax offset. To the extent that a business may be in a tax loss situation for the income year that it claims the deduction, the bonus depreciation will form part of that loss.

Batches of assets – SMEs will be allowed to combine the value of batches of substantially identical assets, and assets that form part of a set, to meet the investment threshold. Whether assets form a set will need to be determined on a case-by-case basis. 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.

Non-taxable use – The deduction 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. However, an SME claiming the deduction must be able to demonstrate that at the time it started to use the asset, or had it installed ready for use, it was reasonable to conclude that it will be used principally in Australia for the principal purpose of carrying on its business.

Use of asset in Australia – An asset does not necessarily have to be located in Australia when an SME begins to use it or have it installed ready for use. However, the purpose test will not be satisfied if it is reasonable to conclude that the business will never use the asset in Australia.

There really is quite some detail to be aware of when considering this deduction, so it is advisable to seek professional advice before committing any expenditure.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.