2009 "Investment Allowance" for business - golden opportunity or not?

[Perp]

If our small business - corporate trustee of our Family Trust - buys a >$1K laptop before 30 Jun 09, will it be eligible for the investment allowance deduction? I understand the deduction is 50% for turnover < $2M - which is us. How exactly does this work, in terms of dollars claimed each year, depreciated value impact, and thus overall affect on cashflow over the life of the asset?

Basically, I'm trying to figure out:

1) is this is a golden opportunity, or not that big a deal?

2) if it's a golden opportunity, which assets are eligible?

 

[coastymike]

Its a nice one isn't it. Basically you get 50% of the value of the asset as the allowance so if the laptop costs $2,000 then you would get $1,000 as an investment allowance. This is on top of the depreciation benefits for small business entities. So if you are an SBE and claiming depreciation at the higher tax rate of 30% then you will get the $1,000 deduction on top of the $300 in depreciation benefits.

What is even nicer is that the investment allowance doesn't need to be apportioned for any private usage unlike depreciation. So if you use you laptop 50% for business and 50% for private usage then the investment allowance is not apportioned.

I think it is a big deal. Basically any asset subject to Divison 40 (depreciation) is eligible. Cameras, artwork, lounges, laptops, plasmas, anything used in your business which is normally subject to depreciation.

The treasury has released a good FAQ on its website http://www.treasury.gov.au/documents/1505/PDF/Frequently_Asked_Questions.pdf

I think a lot of people are confusing it with "extra depreciation". It isn't. It is an allowance. As treasury says in the FAQ "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."

 

[Perp]

Its a nice one isn't it. .... I think it is a big deal. Basically any asset subject to Divison 40 (depreciation) is eligible. Cameras, artwork, lounges, laptops, plasmas, anything used in your business which is normally subject to depreciation.

Awesome! I'm surprised a bigger deal hasn't been made of this boon in the media and on Somersoft, then! Have to think if there are any other assets our corporate trustee needs before June 30...

So to clarify re a $2K laptop: you pay $2K, company claims $1000 investment allowance in 09, plus $300 depreciation allowance, and thus gets deduction of $1300 and saves $390 in tax? And then you still have $1700 in depreciation to claim over subsequent years, saving you a total of 30% x $1700 = $510? That would mean that overall you get $900 back from your $2K investment. Do I have the figures right (assuming company tax rate of 30%)?

What about sole traders? Could they buy business assets and get even more benefit due to being on a higher marginal tax rate? If they can, do they have to differentiate between personal and business use with regards to the investment allowance?

Edit: Others may find this summary useful: purchase dates and how much is deductible in each FY.

 

[Player]

Trustee? or Trust?....carrying out business

Ozperp, is it your Family Trust that's carrying on a (small) business or the corporate trustee?

Is your trustee company actually trading or carying on activites of a small business or is it an empty shell that merely acts as trustee for the Discretionary Family Trust? If it's the latter the assets such as laptop/notebook, etc are therefore purchased by the trust.

 

[Perp]

Is your trustee company actually trading or carying on activites of a small business or is it an empty shell that merely acts as trustee for the Discretionary Family Trust? If it's the latter the assets such as laptop/notebook, etc are therefore purchased by the trust.

I thought if your corporate trustee was the trustee for several DTs, who are each engaged in the property investing business, that the corporate trustee was also "in" the property investing business (in its capacity as trustee), and/or that the corporate trustee could buy assets etc to support it in executing its role as trustee. But I'm far from sure about this and happy to be corrected if I don't understand my own structures.

 

[Player]

Does the corporate trustee have a bank account of it's own and lodge it's own tax returns? If so, then as trustee of other entities also carrying on business activities, the company would be claiming. You need to be aware however that if it is a trading business entity, it may not be the most optimal company to be trustee. Better protection for trustee company to be a two dollar entity, that does (and owns) nothing else.

Or...is it merely the shell (empty company) that acts as trustee for your various DT's. The latter entities may be in the business of property investing, share trading, development or whatever.

In the second scenario, perhaps the trust with the most activity could do the asset purchasing and claiming of this investment allowance and the associated trusts (assuming correct trust deed wording) can enjoy the beneficial use of those assets for their own business activities also.

However do also check with your accountant

This is a very interesting thread.........my next door neighbour just took me for a spin in a Porsche Cayenne on loan from the dealer.......he's doing just this very thing. His car is a business asset and as he reckons he's a long time dead, it's time to replace his eight year old beemer. Now he has to decide between the petrol or the turbo diesal.

I think I may need a new computer and some other goodies for.........I'll work out what it's for

Hmm, what else do I need.............

 

[Nathan]

Also remember GST wikll be paid back oz.

so $180gst (round figures) + $390 tax return.

 

[coastymike]

Player

Agreed. The structure purchasing the asset, whether it be a sole trader, partnership, company or trust must be in "business". The definition of a business is discussed in TR 97/11 http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9711/NAT/ATO/00001

Although this relates to primary production businesses the principles in this ruling are the same for determing whether the activities you are involved in consitute a business.

The ATO has issued a ruling relating to superannuation funds which says that an individual who holds 2 or 3 investment properties is probably not in the business of property investing but someone who holds 25 investment properties and actively manages this portfolio probably will be in the business of property investing. One for your accountant. If you are in property development then this will probably constitute a business and the investment allowance will apply to that entity.

I would argue that a corporate trustee is not in a business but merely a trustee of a trust which may nor may not be in business. It would then be the trust that would claim the investment allowance not the company. This is the great dichotomy between trust law and tax law.

They talk about making things simpler but with every introduction of new legislation it just becomes more and more complex. Good luck Dr Henry.

 

[Perp]

Thanks, Player and coastymike. OK - sounds like my Trust would buy the asset.

It's not my situation - yet - but if I had 5 Trusts of roughly equivalent size/assets/workload, with common corporate trustee and same beneficiaries, would you just nominate one as the owner of the asset, or do you have to split the asset as being 20% owned by each Trust?

And Nathan, I don't think I'd get GST back because I'm not registered for GST. My understanding is that developers would usually be registered, but that the vast majority of property investors wouldn't be registered, would they? (Because residential rental income is an "input-taxed sale".)

 

[Apocalypse]

Its a nice one isn't it. Basically you get 50% of the value of the asset as the allowance so if the laptop costs $2,000 then you would get $1,000 as an investment allowance. This is on top of the depreciation benefits for small business entities. So if you are an SBE and claiming depreciation at the higher tax rate of 30% then you will get the $1,000 deduction on top of the $300 in depreciation benefits.

Where does the "$300 in depreciation benefits" figure come from? I can't work it out applying either prime cost or diminishing value methods?

 

[Perp]

Good point, Apocalypse. Does the "investment allowance" reduce the depreciable value of the asset? I'm wondering if what coastymike is saying is that you claim $1000 as the investment allowance, and then the depreciated value of the asset is $2000 purchase - $1000 investment allowance = $1000. Using simplified depreciation rules, you can then claim 30% of that - or $300 - as depreciation allowance.

If the investment allowance doesn't reduce the depreciable value, then you would be able to claim $600 depreciation allowance, wouldn't you?

 

[coastymike]

Good point. It is $600 in depreciation. Serves me right for responding with the flu. Have fun.

 

[contrary]

Coastymike, you are right, it is a big deal for small businesses, which is why they are going out and buying stuff. Some think it may even increase the price of new cars marginally and reduce the price of second hand cars. I know for some of the capital items I buy some of the sellers have marked up over previously.

The 30% was good, 50% is very good. It's a big incentive to pull forward investment into this year if you have a profitable business. If you bought all your capital equipment last year, bad luck !

 

[SOULFLY3]

really having trouble getting head round it all... so if i buy a brand new ute 30k (being registered for gst also and having an ABN) how much can i claim on next years tax return?


and also along with ozperp would this be worth doing as current ute seems to be on last legs... especially with this entitlement ?

 

[coastymike]

Soul

Assuming you operate a business and your turnover is less than $2m then you can claim 50% as an investment allowance and on top the normal depreciation rates for the new vehicle.

If you are a small business entity then the depreciation rate is 15% for the first income year and 30% for the income years thereafter.

 

[MichaelW]

I've got an ABN for my company as trustee for my HDT and its in the business of property development. BUT, its running at a reported loss so extra deductions don't help me. I'll have to update MYOB to make sure its going to run a loss this year, but I'm pretty sure that's the case...

Shame, would have liked a new ute.

Cheers,
Michael

 

[SOULFLY3]

Hi michal thanks for response, awesome so that means- ie i buy a 30k ute then for the 09-10 tax return i can claim 19,500 for the ute which includes the depreciation ?
then each yeah i can claim $9000 is that right or am i wrong?

 

[coastymike]

Michael

Why wouldn't it help ? It would increase your loss which would then be carried forward to future income years reducing the profit in those years and thereby reducing the overall tax burden.

 

[Electro]

I've been trading with my ABN as a electronics engineering contractor for the past 23 months (straight out of uni). I only work with the one company and it's basically like I am an employee there but I get the benifits of contracting when it comes to tax. I earn whats called 'Personal services income'. Can I still utilize this allowance?

Last year I was able to claim depreciation/interest/fuel on a new car and any other tools/hardware I bought. Would I be able to take advantage of this allowance? (Me thinks so!)

Hypothetically speaking, if I bought a 42" Sony HD "monitor" before the end of the FY will I be able to deduct half its price off my taxable income for 08-09 FY and then depreciate the asset as per usual?

If so I will end up paying only about 60% of cost price over the "monitors" life. Not bad deal I say!!

 

[SOULFLY3]

well thats what im hoping electro with a new ute being a landscaper... but what do we say we use the tv for....