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INVESTMENT ALLOWANCE

QUESTIONS AND ANSWERS

The recently announced Investment Allowance can potentially save your business thousands of dollars of taxation.   However, it is a temporary tax break.

For these reasons, this quarter’s newsletter is dedicated to explaining the Investment Allowance rules to enable you to make sure you qualify, if you are planning to take advantage of this generous tax break.

WHAT IS THE INVESTMENT ALLOWANCE?

The Investment Allowance is a bonus tax deduction, over and above the normal depreciation that can be claimed by Australian businesses undertaking capital investment in 2009.

This will mean -

• An additional tax deduction of 30% of the cost of eligible new depreciating assets acquired under a contract, or started to be constructed after 12.01am AEDT 13 December, 2008 and before the end of June 2009;

and have installed ready for use by the end of June 2010.

• An additional tax deduction of 10% of the cost of eligible new depreciating assets acquired under a contract, or started to be constructed, between 1 July 2009 and 31 December 2009 ;

and installed ready for use by the end of December 2010.

WHAT IS “ACQUIRING” AN ASSET?

A business acquires an asset when they enter into a contract to hold an asset or start to construct an asset.

WHAT IF I MISS THE INSTALLATION DEADLINE?

If you sign a contract for an asset, or start construction by 30 June 2009 but do not start using the asset or have it installed ready for use by June 2010, you will not be able to claim the 30% bonus deduction .

However, as long as the asset is installed by 31 December, 2010 you will still qualify for the 10% bonus deduction.

WHAT ABOUT ASSETS ACQUIRED BEFORE

13 DECEMBER 2008?

Assets acquired prior to 13 December, 2008 are not eligible for the Investment Allowance.

HOW CAN IT BE CLAIMED?

The deduction is claimable in the financial year in which the asset is installed ready for use .

The allowance will take the form of a tax deduction in addition to the usual depreciation deduction you can claim for the asset.

“Small” businesses will be able to claim the deduction for eligible assets costing $1,000 or more (that is $1,100 or more including GST if you are registered for GST).   To benefit from this tax break a business must have a turnover of $2 million a year or less to qualify.

Other businesses can receive the same deductions for eligible assets costing more than $10,000 ($11,000 GST inclusive).

WHAT KINDS OF ASSETS WILL QUALIFY?

Assets eligible for the allowance are new depreciating assets used in carrying on a business, and new expenditure on existing assets used in carrying on a business.   The assets must be used in Australia .

Examples:

• A small business that buys and installs a $2,000 computer before the end of June 2009 can claim an additional $600 deduction in the 2008/2009 tax return.
• A business that buys a $60,000 backhoe before the end of June 2009 can claim an additional $18,000 deduction in the 2008/2009 tax return.

DO SECOND HAND ASSETS QUALIFY?

No – the Investment Allowance will not apply to second hand assets.   The Government is trying to ensure the Tax Break is carefully targeted toward new investment that will upgrade and extend our economy’s productive capacity.

HOW DO I KNOW IF AN ASSET IS ELIGIBLE?

Assets qualifying for the Investment Allowance are new tangible depreciating assets for which a deduction is available under the depreciation rules and new expenditure on existing assets.

WHAT IS A DEPRECIATING ASSET?

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.   Land and trading stock are not depreciating assets.   Software is an intangible asset and therefore also not eligible.

DO BUILDINGS QUALIFY FOR THE INVESTMENT ALLOWANCE?

Capital works, such as buildings, will not qualify.

WHO CAN CLAIM THE INVESTMENT ALLOWANCE?

Provided all of the eligibility criteria are met, the Investment Allowance is to be claimed by the taxpayer that holds the asset.   That is, the same person or entity who claims a depreciation tax deduction relating to that asset.

WILL THE INVESTMENT ALLOWANCE BE REDUCED IF THE ASSET IS USED FOR PRIVATE PURPOSES?

Unlike claiming normal deductions for depreciation where you can’t claim a tax deduction for the private usage of assets,   the Investment Allowance will not be reduced for any non taxable (ie private) use of the asset or apportioned based on the actual taxable use of the asset.   However, 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 would use the asset principally in Australia for the purpose of carrying on your business.

DO ALL CARS QUALIFY OR ARE THERE RESTRICTIONS?

The method you use to work out your car expenses will also determine if you can claim the Investment Allowance.

If you use the ‘one third of actual expenses’, the ‘log book’ method, or the ‘12 per cent of original value’ method you will be eligible for the Investment Allowance.

The Investment Allowance is not available for the cents per kilometre method.   Call us if you need any assistance with this issue.

DOES THE CAR LIMIT APPLY TO THE INVESTMENT ALLOWANCE?

“Luxury Cars” have their cost reduced for the purpose of calculating depreciation deductions.   A taxpayer who is eligible to claim the Investment Allowance for a luxury car will have to use the car limit when working out the amount of their deduction.

The car limit for 2008-09 is $57,180.   This means that, at the 30% rate, the maximum bonus deduction available for a car in 2008-09 is $17,154 ($57,180 x 30%).

Demonstrator vehicles can qualify as ‘new’ assets provided they have only been used for reasonable testing and trialling.

WHAT IF MY BUSINESS IS IN A TAX LOSS SITUATION?

The Investment Allowance is a bonus tax deduction.   It is not a rebate or a refundable tax offset.   If you are in a tax loss situation for the income year in which you claim the Investment Allowance, the bonus deduction will add to that loss.   These losses can usually be carried forward and offset against any taxable profits you make in later years.

As always, if you have any queries, please contact your team accountant.