Part of the Government’s “nation building and jobs plan” announced on Tuesday this week included a temporary extra tax depreciation deduction for businesses. Small businesses can claim an additional 30% tax deduction for eligible assets costing $1000 or more that they acquire from 13 December 2008 to 30 June 2009, and install ready for use by 30 June 2010.
This deduction would seem to be claimable on top of the temporary 10% investment allowance announced by the Government last December (see below).
For eligible assets costing $1000 or more that a business acquires from 1 July 2009 to 31 December 2009, the business can claim an additional 10% deduction where the assets are installed by 31 December 2010.
To benefit from this tax break, a small business must have a turnover of $2 million a year or less. Other businesses can receive the same deductions for eligible assets greater than $10,000.
Assets eligible for the allowance are new tangible depreciating assets and new expenditure on existing assets used in carrying on a business for which a deduction is available under the core provisions of division 40 (capital allowances) of the Income Tax Assessment Act 1997. This can include things like machinery and air conditioning plant and equipment.
Note that land and trading stock are excluded from the definition of depreciating assets, and will not qualify for the extra deduction.
The new deduction will be available to any small and medium sized business that is entitled to the capital allowance deduction under division 40 in respect of the asset. It is on top of the usual capital allowance deduction claimable for the asset as part of the business’s income tax return. The deduction will be claimable in the income year in which the asset is installed ready for use.
But note that the extra deduction is a one-off, and the timeframes noted above determine eligibility.
Treasury is to release draft legislation on these changes for public consultation, so that means there will be some delay before the tax law on this is finally known.
While it is admirable to have consultation on the legislation before it is finalised, it is unfortunate that the Government’s announcement could not be followed up almost immediately with the necessary legislation, because it’s the detail in the legislation that will determine exactly how the concession will work.
Businesses wishing to act quickly on the Government’s announcement should bear this in mind, and might seek appropriate advice.
As anyone involved in tax matters will tell you, the devil is almost always in the detail. While the extra tax deduction will certainly benefit SMEs, a little care is needed.
As mentioned above, it should be remembered that the extra deduction is on top of the 10% temporary investment allowance announced by the Government in December 2008. Legislation for that deduction is still awaited too, so it seems highly likely the Government might take the opportunity to release one set of amendments covering both announcements.
Under the December announcement, expenditure on new tangible depreciating assets incurred after 12 December 2008 and before 1 July 2009 may qualify for a 10% investment allowance, in addition to the capital allowance under the tax law.
That investment allowance will be equal to 10% of the cost of qualifying assets and will be available to businesses who acquire new tangible depreciating assets which cost more than $10,000.
Tangible depreciating assets include most types of plant and equipment, vehicles and other assets that are used by businesses. See my December column 2008 ends with tax “bang” for SMEs for more detail on this.
SMEs that may have already made a decision to invest in new equipment will no doubt now want to press on with that decision, but they should remember that it does require an outlay of funds upfront before the deduction can be claimed in the tax return.
This means there will be the usual delay between expending the funds and seeing the benefit of the tax deduction.
In relation to the Government’s 3 February 2009 announcement, the Treasurer gave the following example of claiming the extra deduction:
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. The backhoe is delivered and ready for use on 20 June 2009 and has an effective life of nine years.
The business will be entitled to claim the 30% deduction because:
Under the tax law, the deduction will be 30% of the backhoe’s first element of cost – $18,000.
When lodging its 2008-09 income tax return (sometime after 1 July 2009), the business will be able to claim this deduction in addition to the usual depreciation deduction in respect of the asset.
If the business had delayed its acquisition until after 30 June 2009, for example until 1 September 2009, and had the backhoe installed ready for use before the end of December 2010, the 10% rate would apply. It would therefore be able to claim a deduction of $6000.
We live in a democratic society. The Government of the day is entitled to put forward measures it chooses. They are then debated by the Parliament.
That is what is happening now concerning the Government’s economic stimulus package. The suite of bills so far introduced to implement the package were passed by the House of Representatives just after 5am this morning. They now go before the Senate.
However, the Federal Opposition has indicated it will oppose the package. That makes the debate in the Senate crucial to the fate of the package – and that debate might not be finalised this week.
SMEs might be well advised to “keep their powder dry” until debate on the Government’s full package of measures, including the extra depreciation deductions (when that legislation is finally introduced), is finalised.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
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