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The Investment Allowance

http://www.swtchartered.com/

THE INVESTMENT ALLOWANCE

As part of the recent wave of government stimulation an investment allowance for business has been created. The idea was originally released in December 2008 and has been modified and revised numerous times since. This has caused some confusion. So, we thought we would create this very informative and helpful article to make things clear and simple….well, as clear and simple as possible. The legislation and corresponding information is, of course, very complex so if you need any more detailed information or have any questions please contact us.

WHAT IS AN INVESTMENT ALLOWANCE?

It is an additional, one off, tax deduction for new depreciating assets.
It is not accelerated depreciation. It is better than that.
It is not an increase in the depreciation cost base. It is better than that.

There are basically two tiers for the allowance with slightly different rules. They are:

  • Business with a turnover under $2m and,
  • Business with a turnover over $2m.

We will deal with each separately so feel free to ignore about half the following information if it does not apply to you.

BUSINESS TURNOVER UNDER $2M

For a small business under $2m the rate of the allowance is a flat 50%

HOW DOES IT WORK?

It is best explained by example. Let’s say the business buys a new asset, for net cost of $20,000, it is depreciated at 20% per year prime cost and, for simplicities sake, you held it for the entire year. So:

  Without allowance  Investment allowance
Depreciation tax deduction $20,000 x 20% $4,000    $4,000          
Investment allowance $20,000 x 50%                  $10,000
Total deduction     $4,000  $14,000

Note that whether the first use of the asset was on the first or last day of the year the investment allowance would remain the same. Depreciation would need to be adjusted based on the days held.

And here is another nice bit, you still get your full depreciation deductions over the life of the asset:

  Without allowance  Investment allowance
Closing written down value of asset    $16,000    $16,000     
Cost $20,000 - $4,000 depn     

Remember though, it is only a tax deduction. You are not getting half of your asset for free. You must apply your tax rate to calculate how much actual money you are saving. Assuming your business is in a company:

Additional saving from the investment allowance    $3,000   
   ($10,000 * 30% tax rate.)    

This works out as an actual saving of only 15% of the net cost of the asset for a company.

TIMING

When you are eligible for the deduction depends on 2 things:

  • The date the contract/order is made
  • The date that the asset is first used/installed

The order must be made between 13 December 2008 and 31 December 2009 and the asset must be installed within 12 months of the contract date. Note that it is backdated to 13 December 2008 so some assets you have purchased may already be eligible

The table below shows the year you will be eligible for the deduction

First use

Before 30/6/09

1/7/09-30/6/10

1/7/10 – 31/12/10

Contract date

13/12/08 - 30/6/09

2009

2010

1/7/09 – 31/12/09

2010

2011

BUSINESS TURNOVER OVER $2M

For a business with turnover over $2m the rate of the allowance is either 30% or 10% depending on the timing. For assets bough before 30 June it was 30%. Anything you pickup from now on will be only 10%

HOW DOES IT WORK?

It is best explained by example. Let’s say the business buys a new asset for net cost of $60,000, it is depreciated at 20% per year prime cost and, for simplicities sake, you held it for the entire year. The rate of the allowance is 10%. So:

  Without allowance  Investment allowance
Depreciation tax deduction $60,000 x 20%   $12,000   $12,000       
Investment allowance $60,000 x 10%                    $6,000
Total deduction  $12,000   $18,000

Note that whether the first use of the asset was on the first or last day of the year the investment allowance would remain the same. Depreciation would need to be adjusted based on the days held.

And here is another nice bit, you still get your full depreciation deductions over the life of the asset.

  Without allowance  Investment allowance
Closing written down value of asset    $48,000   $48,000     
Cost $60,000 - $12,000 depn    

Remember though, it is only a tax deduction. You are not getting 10% of your asset for free. You must apply your tax rate to calculate how much actual money you are saving. Assuming your business is in a company:

Additional saving from the investment allowance       $1,800  
$6,000 * 30% tax rate.    

This works out as an actual saving of only 3% of the net cost of the asset for a company.
(note that for assets entitled to the 30% deduction the saving is actually 9%)

Is this really an incentive to go out and buy expensive assets for you business?

TIMING and RATE

When you are eligible for the deduction and the rate of the allowance depends on 2 things:

  • The date the contract/order is made
  • The date that the asset is first used/installed

The contract must be entered into between 13 December 2008 and 31 December 209 and the asset must be installed within 12 months of the contract date. Note that it is backdated to 13 December 2008 so some assets you have purchased may already be eligible for the allowance at 30%

The table below shows the rate and year for the deduction

First use

Before 30/6/09

1/7/09-30/6/10

1/7/10 – 31/12/10

Contract date

13/12/08 - 30/6/09

30%   2009

30 %   2010

1/7/09 – 31/12/09

10%    2010

10%   2011

RESTRICTIONS for ALL BUSINESS

There are always rules and restrictions and here are some of the traps to avoid:

  • The asset must  have a net cost of at least $1,000 for turnover under $2m or $10,000 for over $2m
  • It only applies to new assets.
    • A second hand ute or tractor would not qualify
  • Leased assets do not qualify as you don’t own the asset.
  • Hire purchase assets do qualify as you do own the asset
    • So if you are financing check if it is HP or a lease
  • Software is not eligible
  • Dams, tanks, capital works, land, buildings etc are not eligible
  • Trading stock such as sheep and cattle are not eligible

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