Time is running out for businesses with less than $2 million in turnover to take advantage of the Federal Government’s 50% investment allowance.
The decision to boost the grant from 30% to 50% in the May budget was a welcome one and saw thousands of businesses spending up on assets in the lead up to the end of the tax year on June 30.
But in the chaos of the Christmas season, don’t forget that the tax break actually runs through to December 31 – which means there’s still time to buy those assets that will help set you up for a big year of growth in 2010.
The tax break allows SMEs with revenue of under $2 million to receive deductions for equipment worth over $1,000, purchased between 13 December 2008 and 31 December 2009, and installed or ready for use by 31 December 2010.
Thousands of entrepreneurs have used the break to purchase essential equipment and keep their businesses moving along during hard times.
However, others have been disappointed after they spent up big, only to realise their purchase wasn’t covered by the allowance.
Marc Peskett, partner at MPR Group, says businesses need to do as much research as possible before buying plant and equipment in order to take advantage of the tax break, and avoid disappointment.
“There are requirements businesses need to know before they buy things. Such as that the allowance applies to depreciating, tangible assets subject to tax deductions under division 40 of the Income Tax act, over $1,000 in value.”
“I would also steer businesses towards buying productive assets. This is a good time to upgrade hardware, any sort of equipment businesses may need, and any tangible asset that will help the business… not just buying things because they can.”
Here are the top 10 ways businesses can take advantage of the investment allowance.
Can I buy a computer and some software with the investment allowance?
If you’ve been waiting on upgrading your company’s computers, now is the perfect time to do so. Buying a new machine is usually a benefit by itself, but many now come preloaded with Microsoft’s new Windows 7 operating system which by itself can cost hundreds of dollars.
But while operating systems like Windows 7 that come pre-loaded onto a computer can be included in your deduction, other software cannot. Any software included in your computer purchase must be deducted from the final price before submitting the purchase as a deduction.
“We’ve had a lot of clients contact us about this topic,” Peskett says. “The investment allowance doesn’t apply to software, just the hardware. An operating system like Windows doesn’t count, but for things like Office, or MYOB or something, that has to be deducted from the final price.”
What do I need to know about cars?
Cars are one of the most popular items claimed under the investment allowance.
Entrepreneurs need to get around, and buying a new vehicle with a tax break gives many an opportunity to upgrade.
Greg Hayes, director of Hayes Knight, says businesses in dire need of new vehicles, including delivery vans, should use the investment allowance while they can.
“If you need to replace a vehicle, or you’re looking ahead and you think that at some point in the future you will need a new car, then this investment for this purpose is worthwhile considering – particularly if you are a small business entity.”
Peskett agrees, but warns businesses there a few things to look out for, particularly that the investment allowance applies to the depreciation limit of the car being purchased.
“If you buy a car worth $80,000, you will get the investment allowance for a certain limit…. which is just over $57,000.”
Peskett also points out the allowance doesn’t negate a company’s usual depreciation claim.
And while Hayes also says the car must be primarily used for the business, it can still be used for personal use. Additionally, certain lease agreements may still allow the car to be claimed under the allowance.
“As a general principal, we don’t say to people to go out and buy something because the allowance is there. But if you’re already thinking about getting a car, this is a good opportunity to buy one.”
Are buildings covered by the allowance?
Buildings, real estate and renovations aren’t covered under the investment allowance, but Hayes says businesses can still take advantage of the tax break when building new pieces of equipment.
“These are particularly viable for agricultural businesses and properties. So a farmer putting a shed on their business, he would qualify for the allowance. Or a pool being installed in a caravan park or motel, a new cool room, etc. There are some quirky things that can actually fall into the definition of plant/equipment.”
“These are things that provide an extension of the business but would not be commonly seen as a building or structure, more categorised as plant and equipment.”
Hayes says equipment such as sheds, fences and silos can be covered under the allowance, but even less common items such as elevators can be claimed as an investment. “If you’re building something new… check with your accountant to see if you qualify.”
Can I buy furniture?
Want to spruce up the office? Buying new furniture will give your workplace a completely new look, and even better – you’re eligible for the allowance.
The normal $1,000 rule applies, but businesses can take advantage of this by pooling pieces of furniture together. Hayes says businesses can buy a “package” of furniture (containing four chairs and a table, for example), over $1,000 and still claim the allowance.
As long as those bundled assets are “integral to the same function… then arguably you can bundle those to get them over $1,000”.
And this doesn’t just apply to furniture. If you can find a group of assets that work together as a set and cost over $1,000 together, then the investment allowance can be claimed. A good example of this might be a desktop computer, monitor and keyboard.
I’m going to make a loss. Does the allowance apply for me?
Many businesses may doubt their eligibility to claim the investment allowance if they plan to record a loss in the next year’s tax return. But Hayes says this is not the case.
“Yes, it could be possible that your investment allowance entitlement is greater than the business income of the entity for the year,” he says. “Then the investment allowance is deducted against all income for the year in which it is entitled to be claimed. The legislation does not seem to preclude the investment allowance giving rise to a tax loss.”
Additionally, Hayes says where a business is eligible for the allowance but does not produce any income for a number of years, that loss is carried forward. “So effectively the benefit of the investment allowance only triggers when you have a taxable income to apply it against.”
Can I buy an asset for personal use and claim it under the allowance?
The investment allowance conditions stipulate equipment and plant must be purchased with the full intention of using that equipment primarily within the business. But Hayes says entrepreneurs wanting to use their equipment for some personal use aren’t excluded from doing so.
“What the legislation says is that the asset must be primarily used in the business, but it must be used more than 50% in the business – no pro rata. If you bought a car, and say, used 20% of its usage for private purposes, you are still entitled to do that.”
Can I buy second hand equipment?
Second hand equipment cannot be claimed under the investment allowance, but businesses should be aware certain types of display models, including “demonstrator vehicles”, are eligible to be claimed.
How does the allowance actually work? Is it a cash rebate or tax deduction?
Taking advantage of the allowance can offer businesses a considerable tax benefit, but only if used properly. Hayes warns business owners to be informed about how the investment allowance works or risk disappointment.
“One big misconception is that people think it’s a refund, and that they will actually get a cash rebate. But that’s not correct. This investment allowance is a deduction that applies to the tax return of the business.”
“So this reduces the amount of payable tax a business has to pay. The tax office doesn’t get out their cheque book and write you a cheque, so it isn’t a cashflow benefit as much as it is a tax flow benefit.”
Hayes also says the investment deduction is totally separate from a business’s regular depreciation deductions.
What about financing and holding periods?
The experts say there are a number of financing traps to watch out for when applying for the allowance.
Hayes says businesses looking into hire purchase agreements, which allow a business to purchase goods through instalments but continue using those goods while paying for them, must have their agreements in place at the same time they put in their order for an asset.
Hayes says that while the equipment doesn’t have to be installed until the end of 2010, the financial arrangements must be in place before the end of this year.
“If someone rushes out and buys a car on the 27th of December, puts a deposit down and all that, and has it delivered early in the new year and then puts the purchase agreement down, that won’t do. It has to be before 31 December 2009.”
Peskett points out another financing issue related to leased equipment, which is not eligible for the allowance.
“It won’t apply to leased equipment. If you take out a lease to buy some computer hardware, it’s the lessor that’s eligible for the allowance, the finance provider and not the lessee, unlike other finance arrangements, it would be the equipment.”
Sue Prestney, principal of accounting firm MGI Melbourne, says businesses could be caught out when trying to sell an asset which had been used to claim the allowance.
“You are able to claim the investment allowance for an asset where, at the time you first use it, it is reasonable to conclude that you will use the asset principally in Australia for the purpose of carrying on a business.”
“There is no requirement that you use or hold the asset for any specific period of time, but you do need to be mindful that anti-avoidance provisions would potentially apply to a taxpayer who claimed the investment allowance on an asset they intended to resell.”
If the ATO discovers an asset was sold shortly after it was obtained in order to gain the allowance, it might reject a business’s claim.
Businesses should also take heed of recent warning from finance specialist Matthew Atkin, who warns banks are becoming more stringent on providing funds for plant and equipment.
Can I buy an asset from overseas?
As long as an asset is tangible, new and intended to be used primarily in the business applying for the allowance, then overseas assets can be purchased. But Hayes says businesses looking to take advantage of the allowance have a few extra tricks up their sleeve.
“Where there are costs associated with installing the asset into your business, which could include freight costs to bring it into the country, then the cost base of the asset would include the installed price.”
“Where you have any unusual circumstances it is a good idea to discuss it with your accountants who can confirm all of the facts and relevant details.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
