Investment Allowance: Small Business and General Business Tax Break
27-05-2009 

The Government recently announced a small business tax break in the economic stimulus package. We have had many enquiries from out clients as to how they can take advantage of this tax break.

The tax break - which comes in the form of an investment allowance - provides:

- Small business entities (turnover of less than $2 million a year) will receive an additional tax deduction of 50 percent on the cost of eligible new tangible depreciating assets where the business commits to investing in the assets between 13 December 2008 and 31 December 2009 and first uses the assets, or installs it for use, or (in the case of a new investment in an existing asset) brings the asset to its modified or improved state on or before 31 December 2010.

 Such businesses are also eligible to receive an additional tax deduction of 10 percent on the cost of eligible new tangible depreciating assets where the business commits to investing in the asset between 13 December 2008 and 30 June 2009 and first uses the asset, or installs it ready for use, or brings the asset to its modified or improved state between 1 July 2010 and 31 December 2010. 

 - Some Additional Notes

Generally a business 'commits' to investing when: a) it enters into a contract under which the asset will be held or improved; b) it starts to construct the asset or improvement; c) or it stands to hold the asset in some other way.

 Small business entities can claims the 50% deduction for investments in eligible assets of $1,000 or more.

For other businesses, a minimum expenditure threshold of $10,000 applies in order to be eligible to claim the 30 or 10 percent deduction.

The cost of items forming part of a set and the cost of identical or substantially identical assets may be added together for the purposes of meeting the thresholds.

All assets must be used principally in Australia for the principal purpose of carrying out business and must meet certain eligibility criteria.

This tax break will also apply to business cars. Land and training stick do not qualify for the tax break. 

Provided all of the eligibility criteria are satisfied for the income year, the tax beak can be claimed as a tax deduction in the income tax return for the income year in which the asset is first used or installed ready for use.

The new tax return label is called 'Small Business and General Business Tax Break' and will be available in return forms for 2009 and future years.

- Example

Almost every business operator is interested in how to use the 50 percent investment allowance announced by the Government in the economic stimulus package. In general, the investment allowance applies to tangible depreciating assets that you would ordinarily acquire over the course of your business.

For example, Michael runs a restaurant business through his company ABC Pty Ltd. The annual turnover of ABC is less than $2 million. The company is classified as a small business entity for tax purposes.

ABC purchased a brand new oven on 1 May 2009 for $7,700 (GST inclusive). The supplier installs the oven on 15 May 2009 for $440 (GST inclusive). ABC is entitled to claim GST credits of $740 and the cost of the oven for tax depreciation purposes is $7,400.

As ABC is a small business entity, the expenditure threshold has been met, and the company is entitled to the 50 percent tax break. ABC can claim a bonus tax deduction in its 2009 tax return or $3,700. ABC will also be able to claim depreciation deductions based on the cost of the oven so that total deductions claimed by the company will amount to $11,100 (i.e. $7,400 depreciation deductions plus $3,700 bonus deduction).

In additions to the investment allowance, businesses would also claims the normal depreciation deductions over the effective life of the asset.

The allowance will be claimed as an additional deduction in the tax return for the year in which the asset is first used or installed.

If you have any further enquiries, please feel free to contact us.