INCREASE AND EXTENSION OF INVESTMENT ALLOWANCE
The Federal Treasurer has announced three important changes to the 10% temporary investment allowance tax deduction that was initially announced in December 2008. The Treasurer’s press release indicates the following changes (yet to be confirmed by the legislation). These three important changes are summarised below:
Tax Deduction increased from 10% to 30% on assets ordered by 30 June 2009
The investment allowance rate has been increased from 10% to 30% for eligible assets that are acquired, or construction commenced after 13 December 2008 and before 1 July 2009 and installed by 30 June 2010. Note that the Treasurer’s press release was not entirely clear whether this only applied to small business or less that $2 million turnover but we have received verbal confirmation from Federal Treasury that the increase from 10% to 30% is not restricted to small businesses i.e. businesses with more than $2 million turnover are also eligible for the 30% rate of investment allowance.
10% investment allowance extended to 31 December 2009
The cut off for acquiring or commencing construction of assets for the investment allowance has been extended from 30 June 2009 to 31 December 2009 (and installed ready to use by 31 December 2010) but the rate if investment allowance for assets acquired or commenced construction between 1 July 2009 and 31 December 2009 will remain at 10%.
Small business asset threshold decreased from $10,000 to $1,000
To be eligible for the investment allowance as previously announced, assets had to have a value of over $10,000. The press release says this has been relaxed to $1,000 or more per asset for small businesses that have an annual turnover of $2 million or less. For other businesses the threshold remains at over $10,000 per asset. This means small businesses can get the investment allowance on individual assets costing $1,000 or more; whereas other business only get the investment allowance if the individual asset value is over $10,000.
· Additional tax deduction equivalent to 10% of the cost of acquiring or constructing the new asset.
· Available for expenditure over $10,000 on individual assets
· Applied to assets acquired under a contract made or construction commencing between 13 December 2008 and 30 June 2009
· Asset must be installed ready for use by 30 June 2010.
· Small businesses (turnover less than $2 million) can claim an additional deduction of 30% (in lieu of 10% under the previous announcement) on assets costing at least $1,000
· All other businesses can claim an additional deduction of 30% (in lieu of 10% under the previous announcement) on assets with a purchase price exceeding $10,000.
· In both cases, the same asset acquisition rules apply. The assets must be acquired under a contract made or construction commencing between 13 December 2008 and 30 June 2009 and the asset must be installed ready for use by 30 June 2010.
· In addition, a deduction equivalent to 10% of the purchase price of assets may be claimed on assets acquired between 1 July 2009 and 31 December 2009 where the assets are installed ready to use by 31 December 2010. Small businesses can claim on all assets with a value of at least $1,000 whilst all other businesses can claim on assets with a value in excess of $10,000.
Types of Assets
· The allowance can be claimed for spending on new assets and new expenditure on existing assets (acquisition of second hand assets is excluded).
· The allowance applies to tangible assets used in Australia in carrying on a business for which a depreciation deduction is available
· The allowance will apply to most new tangible depreciating assets. This includes plant and equipment (i.e. Sub-division 40B assets). It excluded capital works, such as land and buildings, trading stock, and intangible assets and rights. It appears software will not be eligible.
Calculating the Allowance
· The allowance is claimed as a tax deduction through the income tax return for the taxpayer for the year the cost is incurred. It is not a cash payment from the Tax Office.
· The investment allowance applies at a rate of 30% or 10% of the asset’s cost (depending on the date acquired as discussed above).
· Cost is defined as the first element of capital allowance cost (cost of acquiring the asset excluding GST).
· Where the allowance is being claimed for the new expenditure on an existing asset, the allowance will be claimed on the second element of capital allowance cost (e.g. improving or changing an existing asset).
· The investment allowance is in addition to the normal capital allowance (depreciation) deductions.
Below is a worked example that was included in the press release:
A landscaping business entered into a binding contract to acquire a new backhoe on 20 May 2009 at an all-inclusive cost of $60,000 (we assume this is excluding GST). The backhoe is delivered and ready for use on 20 June 2009 and has an effective life of 9 years.
The business will be entitled to claim the 30% deduction because:
· A backhoe is a depreciating asset for which the business would be entitled to claim a deduction under the core provisions of Subdivision 40-B of ITAA97
· The business started to hold the asset between 13 December 2008 and the end of June 2009
· The asset was installed ready for use before the end of June 2010.
The deduction will be 30% of the asset’s first element of cost under Subdivision 40-C, which is $18,000.
When lodging its 2008/09 income tax return the business will be able to claim this deduction in addition to the usual depreciation in respect of the asset.
If the business has delayed this investment until after 30 June 2009 – for example, until 1 September 2009 – and had it installed ready for use before the end of December 2010, the 10% rate would apply. It would be able to claim a deduction of $6,000.
This article has been written by PKF Chartered Accountants & Business Advisors