By now, most business owners would have at least heard about the small business tax break, however many of those owners may not have taken advantage of this incentive. The deadline is drawing near but it’s not too late to capitalise. Here is what you need to know to do so.
If you are a small business owner with a turnover of less than $2 million per year, then you are entitled tax deduction of 50 per cent of the cost of eligible new tangible depreciating assets where you commit to investing in the asset between 13 December 2008 and 31 December 2009 and first use the asset, or install it 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 31 December 2010. However you must note that there is a minimum expenditure threshold of $1,000 in order to be eligible.
If your business has a turnover of over $2 million per year then you would have been entitled to a tax deduction of 30% of the cost of eligible new tangible depreciating assets if you committed to investing in the asset between 13 December 2008 and 30 June 2009 to be installed between 13 December 2008 and 31 December 2010.
Although this deadline has been and gone, if you didn’t take advantage of it at the time you may still be eligible for a 10% deduction on an asset you commit to invest in before the end of this calendar year and install by the end of the next calendar year. However you must note that there is a minimum expenditure threshold of $10,000 in order to be eligible.
What does ‘commit’ mean?
Generally, a business ‘commits’ to investing when:
• It enters into a contract under which the asset will be held or improved
• It starts to construct the asset or improvement or
• Starts to hold the asset in some other way.
Can related items be grouped in order to reach the threshold?
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.
Can assets be used outside of Australia?
All assets must be used principally in Australia for the principal purpose of carrying on a business and meet certain eligibility criteria.
What is meant by “new”?
The description of the new investment allowance refers to the tax break being available for new, tangible depreciating assets or new expenditure on existing assets. The term new here refers to assets that have not been used anywhere, by anyone, except for those assets that have only been used for reasonable testing and trialing.
What is (or is not) an eligible asset?
• The tax break applies to new, tangible depreciating assets such as cars, vans, trucks and other business vehicles; computer hardware, tools and furniture as well as investments in existing assets such as substantial improvements or additions.
• It does not apply to second-hand goods, land, capital works, trading stock and intangible assets such as software or intellectual property rights.
Do Cars Qualify?
Yes. New cars for business purposes as well as demonstrator vehicles qualify provided they have only been used for reasonable testing and trialing. (Although this is provided that all the other criteria are met). You need to note the following:
• Taxpayers using the ‘one-third of actual expenses’, ‘log book’ and the ‘12% of original value’ methods are eligible for the tax break.
• Taxpayers using the ‘cents per kilometer’ method are not eligible to claim the Tax Break.
Do assets held under lease qualify?
If the asset being leased is new, a tangible and depreciating asset for which a deduction is available under the core provisions of Div.40, then it will be eligible for the tax break.
Div.40 provides an outline for determining who, in a leasing arrangement, is able to claim depreciation deductions in respect of the asset and hence would be entitled to claim bonus deduction in a leasing situation.
As with capital allowance deductions how the tax break is factored into lease prices will be a matter for commercial negotiations.
With most leasing arrangements it is the lessor who is considered to be the holder of the asset and therefore they are able to claim the bonus deduction, if it is eligible. However, in some cases if is deemed that the lessee is reasonably expected to own the eligible asset at some point in time then they may be able to claim the bonus deduction in relation to the asset.
Do Buildings Qualify?
No. Land, buildings, trading stock and intangible assets are all excluded from the definition of a depreciating asset in section 40-30. These assets are not eligible for the Tax Break.
Is the tax break available to more than just small business entities?
Yes. Bonus deductions are available to all businesses. However, small business entities only need to spend a minimum of $1,000 per asset in order to qualify for the 50% Tax Break. Other businesses need to meet the minimum spend of $10,000 to be able to qualify for the 10% bonus deduction.
Provided all of the eligibility criteria are satisfied for the income year, the tax break 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 relating to the 2009 and later relevant years.
For more information about whether your business may be eligible for the investment allowance or perhaps you are considering making a purchase and need advice as to whether you can claim the tax break, contact The Quinn Group on 1300 QUINNS or or click here to submit an online enquiry.