This is a more technical guide regarding the recently introduced 50% Small Business Tax Break, including eligibility requirements, application of the Tax Break, considerations for not applying the Tax Break, as well as some worked examples. Who is Eligible? Small business entities will be able to claim a bonus tax deduction of 50 per cent for eligible assets costing $1,000 or more (exclusive of GST) that they:
- commit to investing in between 12:01am AEDT 13 December 2008 and 31 December 2009; and
- start to use or have installed ready for use by 31 December 2010.
To qualify for the 50 per cent rate you need to meet the definition of a small business entity in section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997). This generally means that the taxpayer is carrying on a business and has an annual turnover of $2 million or less.
How and when? Provided all of the eligibility criteria are satisfied, you can claim the Tax Break as a tax deduction in your income tax return for the income year in which you start to use an eligible asset or have it installed ready for use. It’s simply another Business Expense
What if the Tax Break creates a tax loss? The Tax Break provides a bonus tax deduction – it is not a rebate or a refundable tax offset. To the extent that you are in a tax loss situation for the income year that you claim the Tax Break, the bonus deduction will form part of that loss. The usual rules regarding the carrying forward of tax losses will apply. Hence you do not loose the benefit of the additional 50% allowance/tax break. It is carried forward to future income years until profits have been derived.
Does the Tax Break affect any other deductions? The Tax Break will provide a bonus deduction. It has no impact on deductions for an asset’s decline in value claimed under Division 40. This means that, over time, a taxpayer could effectively claim deductions of up to 150 per cent of the asset’s value.
Are second-hand assets eligible? The Tax Break is not available for second-hand assets.
Is software eligible? Software is an intangible asset. The Tax Break is only available for tangible assets, hence software is not eligible. Where a taxpayer purchases a package that consists of hardware and software, apportionment between the hardware and software would occur, based on the cost of the items if they were purchased separately (as per section 40-195). Only the portion of the package’s cost that is attributable to the hardware will be eligible for the Tax Break, provided the eligibility criteria are satisfied.
Will the Tax Break be reduced for any non-taxable use of the asset? ie. Would the allowance/tax break need to be adjusted for private usage? The Tax Break 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. You must be able to demonstrate that at the time you started to use the asset, or had it installed ready for use, it was reasonable to conclude that you will use the asset principally in Australia for the principal purpose of carrying on your business.
Do all cars qualify, or are there restrictions? There are four methods that taxpayers can use to work out deductions for car expenses for an income year. The choice of method will also determine whether the taxpayer can claim capital allowance deductions under Division 40 in relation to the car. Taxpayers who use the ‘one-third of actual expenses’ and ‘log book’ methods are able to claim deductions under Subdivision 40-B and may be eligible for the Tax Break. Taxpayers using the ‘12 per cent of original value’ and ‘cents per kilometre’ methods to determine the car expenses are not eligible for capital allowance deductions. However, taxpayers will not be excluded from the Tax Break merely because they use the 12 per cent of original value method. That is, the legislation rules these cars ‘in’ for the purposes of the Tax Break even though a deduction is not available under Subdivision 40-B.
Jointly held assets? Where an eligible asset is jointly held, a taxpayer will be able to recognise all other business interests in that underlying asset for the purposes of meeting the relevant investment threshold. However, they will only be able to claim the Tax Break to the extent of their interest in the underlying asset.
Easy Worked examples Maria runs a retail clothing store and meets the definition of a small business entity. On 7 June 2009 she purchases and installs six new mirrors for her fitting rooms. The mirrors cost $200 each and are substantially identical, so the cost of each mirror can be amalgamated for the purposes of meeting the $1,000 threshold. Maria’s total investment is $1,200 and she will be eligible to claim a $600 bonus deduction (being 50 per cent of $1,200) in her 2008‑09 income tax return. Ben operates a courier service. He also meets the definition of a small business entity. He orders and takes delivery of a new, more fuel-efficient delivery van in June 2009 at a cost of $30,000. Ben will be eligible to claim a bonus tax deduction of $15,000 in his 2008-09 tax return. The Sunshine Bakery is a small business. On 12 October 2009, the company purchases and installs a new oven at a cost of $5,000. It will be eligible for a bonus deduction of $2,500 which it can claims in its 2009‑10 tax return.
Disclaimer: Before making any purchases, as a result of reliance on the above 50% Allowance/Tax Break, please contact us to ensure you know exactly how this will affect you and your purchase.
Any questions? Please do not hesitate to contact us for further information.