New details on the 50% small business tax deduction

The bill implementing the new temporary investment allowance for businesses, especially SMEs, is now law.

It received Royal Assent on 22 May 2009. There is now some certainty for SMEs about claiming the new allowance – provided of course, they have the funds to invest in assets that qualify for the deduction.

In the 2009 federal budget, the Government announced that it would increase the rate of the one-off bonus tax deduction available to small businesses under the small business and general business tax break to 50% where a small business acquires an eligible asset between 13 December 2008 and 31 December 2009, and the asset is installed or ready for use by 31 December 2010.

Under the tax law as it now stands, if a taxpayer is a small business entity, then only the 50% rate is relevant. A taxpayer is a small business entity for an income year, rather than at a point in time.

To qualify for the lower “new investment threshold” ($1000 rather than $10,000, that is the asset must cost $1000 or more to qualify for the investment allowance), a taxpayer needs to be a small business entity for the income year in which they undertake new investment in an eligible asset, put that asset to use, or claim the tax break.

If taxpayers are eligible for the lower threshold for an income year, they will be able to deduct 50% of their “recognised new investment amounts” (see example below) in relation to an asset for that income year.

SMEs should remember that the tax break is a tax deduction, that is, it reduces taxable income. Also, if funds are borrowed to acquire as asset that qualifies for the tax break, the interest on those funds will generally be tax deductible.

The case for a home delivery business

George operates a home delivery service. He orders and takes delivery of a new, more fuel-efficient, delivery van on 25 June 2009 at a cost of $30,000. The van is a tangible, depreciating asset for which a deduction is available under the tax law.

In 2007-08, George was carrying on a business and his aggregated turnover was less than $2 million and it is likely to be less than $2 million again in 2008-09. Under the law, George’s investment in the van has an investment commitment time of 25 June 2009 which is between 13 December 2008 and 31 December 2009. His first use time in relation to the van is also 25 June 2009 which is before the deadline of 31 December 2010.

This gives George a recognised new investment amount in relation to the van of $30,000 for the 2008-09 income year.

George’s new investment threshold is $1000, which his investment in the van exceeds. He has satisfied all of the eligibility criteria that apply to him and can claim the tax break at the 50% rate. He can claim a bonus deduction of $15,000 in his 2008-09 tax return.

New key dates

The following table summarises the new key dates relating to the different rates at which the tax break could be claimed for SMEs using standard income years (subject to all other conditions being met).

Key points to remember

Here is a reminder of some key details of the new deduction:

• 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 computer 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.
• 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.
• Eligible assets held under a lease may still qualify for the tax break. However, the bonus deduction can only be claimed by the entity in the leasing arrangement who would claim capital allowance deductions in relation to the asset under subdivision 40-B of the tax law. SMEs need to be especially careful of lease arrangements as they may affect who can claim the deduction. Advice from your accountant or adviser should be sought here.

Other points to note

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 eg Div 40 of the ITAA 1997. This means that, over time, a taxpayer could effectively claim deductions of over 100% 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 “1/3rd 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.

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 use the principally in Australia for the principal purpose of carrying on its business.

Many SMEs have been waiting for this new “temporary” tax deduction to become law before committing to acquiring qualifying assets. Even though the deduction can be claimed in the 2009, 2010 and 2011 financial years, the 30 June 2009 deadline for claiming in 2008-09 tax returns is close.

SMEs should not however, rush in before consulting their advisers about the ins and outs of the deduction. There are some technicalities to be aware of which mustn’t be overlooked.

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