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DRAFT INVESTMENT ALLOWANCE LEGISLATION
The Federal Treasury has issued draft legislation for the proposed investment allowance in Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009.
In an effort to generate an immediate boost to business investment, the Federal Treasurer announced on 12 December 2008 a temporary 10% investment allowance for new assets purchased, ordered or construction commenced prior to 30 June 2009 where the cost of the asset was more than $10,000 and the asset was used in a business.
On 3 February 2009, the Treasurer announced some important enhancements to the investment allowance, including an increase of the rate from 10% to 30% for items purchased, ordered or commenced construction before 30 June 2009 and an extension of the 10% investment allowance for items purchased, ordered or commenced construction before 31 December 2009. The Treasurer also reduced the asset value threshold for small business from $10,000 per asset down to $1,000 per asset.
Between the initial announcement in December 2008 and the announcement of the enhancements in February 2009 the name of the "investment allowance" had changed to the "small business and general business tax break". It appears the Federal Government saw a marketing opportunity to promote the reduction of the asset threshold for small business by putting "small business" in the name. However this has probably caused some confusion as to whether the new "tax break" only applied to small business.
The Federal Government’s promotion of the extra small business concession by changing the name from "investment allowance" to "small business and general business tax break" in its 3 February press release can probably be excused as being a marketing opportunity too good to miss. However, it is regrettable that this marketing opportunity has been included in the name of the draft Bill and the proposed Div 41 of the Income Tax Assessment Act 1997 (ITAA 1997). The term "investment allowance" is a simple term and is well known to most of the accounting, legal and business community; whereas the term "small business and general business tax break" is, confusing, imprecise and too long. It is hoped the government will change the name of the Bill and the proposed Div 41 of ITAA 1997 when the Bill is introduced into parliament.
Although the Bill refers to "small business and general business tax break" in this article we have referred to it as the "investment allowance".
Questions answered
The press releases did not give much detail on the investment allowance and so there were a number of questions that can now be answered with the release of the draft legislation. Below is a list of some of the more frequently asked questions about the investment allowance:
Does the investment allowance only apply to small businesses?
No, it applies to all businesses but small businesses (<$2m turnover) have a lower asset value threshold ($1,000 instead of $10,000). Although the government has emphasised the extra concession for small business by referring to small business in the name of the concession, it is not clear why as medium to large businesses will probably claim as much if not more of the investment as would small businesses.
Can I claim the investment allowance on cars and other motor vehicles?
Yes, cars are eligible, except for cars that are using the cents per kilometre method of claiming tax deductions for the car. This is different to previous investment allowances, which excluded motor vehicles. Does it apply to luxury cars?
Yes, except the cost on which the investment allowance can be claimed will be the luxury car limit.
Can I claim on acquisition of second hand assets?
No, the investment allowance is generally only available for the cost of new assets or cost of improving existing assets.
Does it apply to new assets for use in a rental property?
No, the assets must be used in Australia in carrying on a business. Taxpayers with rental properties are usually not considered to be carrying on business (there may be some exceptions where the property holding activities are extensive).
Can I claim on acquisition of computer software?
No, intangible assets such as computer software are specifically excluded. It also excludes capital works, such as land and buildings, and trading stock.
If I buy a number of the same assets that individually cost less than the asset value threshold but in total exceed it are they eligible for the investment allowance?
No. The asset value threshold applies on a per asset basis.
Can I claim the investment allowance on a car that uses the 12% of cost method or other assets that are depreciated under the small business pooling method or under the R&D concessions?
Yes, these items are specifically included as eligible.
If I use the asset only partially for business purposes can I claim the investment allowance on the whole cost?
Yes, provided you install it ready for use in Australia for the principal purpose of carrying on a business (principal purpose would generally mean more than 50%). This is a change to the Treasurer’s press release on 12 December 2008, when he stated the investment allowance will be available "to the extent that the asset will be used for a taxable purpose in carrying on a business". The draft legislation does not include this restriction and the explanatory memorandum specifically states that the reduction for non-business use will not apply.
If I dispose of the asset or stop using it principally for business use within 12 months will there be any claw back of the investment allowance?
No, unlike previous investment allowances, there will be no claw back in these circumstances.
Summary of draft legislation
Below is a summary of the draft legislation for the investment allowance.
New Div 41
The exposure draft introduces new Div 41. In order to determine whether an asset qualifies for the investment allowance, it is necessary to consider whether:
The asset must be a depreciating asset. Land and trading stock are specifically excluded from depreciating assets, as are assets covered by Subdiv 40-F, 40-G and 40-J (primary production and carbon sink forests). Intangible assets are specifically excluded from the operation of Div 41, as are buildings which are deductible under Div 43.
There are also several classes of assets which are included in Div 41 which are not covered by Div 40:
Qualifying asset
The asset must be a qualifying asset. The asset must either:
Where there is a pre-existing asset and expenditure is undertaken to improve the asset, that expenditure will qualify for the allowance where the expenditure would be included in the second element of the asset’s cost for Div 40 purposes.
Are you entitled under s 40-25?
To be entitled to claim the investment allowance, you must be the holder of the asset in accordance with s 40-40. This will usually mean the owner of the asset but there are some exceptions, for example, the lessor (owner) of a leased luxury car is not the holder, the lessee is taken to be the holder instead. Where the asset is covered by a hire purchase arrangement, the hirer will be entitled to the allowance.
You use the asset for a qualifying purpose
To be entitled to the allowance, you must use the asset for the principal purpose of carrying on a business. This means:
There is no clawback of the allowance. If the asset is later sold, no amount is included in assessable income. Similarly, if the asset is subsequently used for non-business purposes, no amount is included in assessable income.
Sufficient expenditure
The rules regarding the required level of expenditure have not changed. For small business entities (Div 328 definition), the required level of expenditure on individual assets is a minimum of $1,000. For all other businesses, the minimum level is $10,000.
As noted in the explanatory memorandum, to qualify for the $1,000 threshold, the taxpayer must be a small business entity in the year they make the investment, use the asset or claim the allowance. An example is given of a taxpayer which is a small business entity when the asset is purchased, but by the time it is installed and the allowance is claimed, the taxpayer is no longer a small business entity. The taxpayer continues to be entitled to the $1,000 threshold.
The draft Bill specifies that the threshold applies to each asset. The explanatory memorandum explicitly states investments in multiple, different assets will not be amalgamated for the purposes of meeting the threshold. However, multiple amounts incurred in relation to the same asset can be amalgamated.
Timing requirements
The timing requirements for the ordering and installation of qualifying assets have not changed.
To qualify for the 30% allowance, you must contract to acquire the asset (or commence construction) between 13 December 2008 and 30 June 2009. In addition, the asset must be used (or installed ready for use) by 30 June 2010.
Where the asset is contracted (or construction commences) prior to 30 June 2009, but it is used (or installed ready for use) between 1 July 2010 and 31 December 2010, you will be entitled to a 10% allowance.
Where the asset is contracted (or construction commences) between 1 July 2009 and 31 December 2009, and it is used (or installed ready for use) before 31 December 2010, you will be entitled to a 10% allowance.
This table from the explanatory memorandum summarises the availability of the allowance:
There are integrity provisions which prevent taxpayers from renouncing contracts (or recommencing construction) which occurred prior to 13 December 2008 for the purpose of refreshing the contract (or the construction) after 13 December 2008 to provide access to the investment allowance.
What is your entitlement?
Where you satisfy all the requirements of the allowance, you claim the allowance in the income tax return for the year in which the asset is first used or installed ready for use. The allowance is in addition to any depreciation claimed.
Where the asset is a new asset, the applicable percentage (10% or 30%) is applied against the first element of the asset’s cost (acquisition cost excluding GST where the taxpayer is entitled to input tax credits) and any second element costs (costs incurred in installing the asset and any additional costs).
Where the expenditure is an improvement to an existing asset, the applicable percentage is applied against the second element costs incurred within the applicable dates.
Where the asset is a car, the luxury car limit will apply. This limits the allowance available to acquisitions of cars which exceed the luxury car limit ($57,180 for the 2009 year) to the luxury car limit.
The contents of this paper are for general information only. They are not intended as professional advice and you should consult a chartered accountant or other suitably qualified professional. PKF expressly disclaims all liability for any loss or damage arising from reliance upon any information in this paper.
Source: CCH Tax Week, Issue 10, 12 March 2009
The Federal Treasury has issued draft legislation for the proposed investment allowance in Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009.
In an effort to generate an immediate boost to business investment, the Federal Treasurer announced on 12 December 2008 a temporary 10% investment allowance for new assets purchased, ordered or construction commenced prior to 30 June 2009 where the cost of the asset was more than $10,000 and the asset was used in a business.
On 3 February 2009, the Treasurer announced some important enhancements to the investment allowance, including an increase of the rate from 10% to 30% for items purchased, ordered or commenced construction before 30 June 2009 and an extension of the 10% investment allowance for items purchased, ordered or commenced construction before 31 December 2009. The Treasurer also reduced the asset value threshold for small business from $10,000 per asset down to $1,000 per asset.
Between the initial announcement in December 2008 and the announcement of the enhancements in February 2009 the name of the "investment allowance" had changed to the "small business and general business tax break". It appears the Federal Government saw a marketing opportunity to promote the reduction of the asset threshold for small business by putting "small business" in the name. However this has probably caused some confusion as to whether the new "tax break" only applied to small business.
The Federal Government’s promotion of the extra small business concession by changing the name from "investment allowance" to "small business and general business tax break" in its 3 February press release can probably be excused as being a marketing opportunity too good to miss. However, it is regrettable that this marketing opportunity has been included in the name of the draft Bill and the proposed Div 41 of the Income Tax Assessment Act 1997 (ITAA 1997). The term "investment allowance" is a simple term and is well known to most of the accounting, legal and business community; whereas the term "small business and general business tax break" is, confusing, imprecise and too long. It is hoped the government will change the name of the Bill and the proposed Div 41 of ITAA 1997 when the Bill is introduced into parliament.
Although the Bill refers to "small business and general business tax break" in this article we have referred to it as the "investment allowance".
Questions answered
The press releases did not give much detail on the investment allowance and so there were a number of questions that can now be answered with the release of the draft legislation. Below is a list of some of the more frequently asked questions about the investment allowance:
Does the investment allowance only apply to small businesses?
No, it applies to all businesses but small businesses (<$2m turnover) have a lower asset value threshold ($1,000 instead of $10,000). Although the government has emphasised the extra concession for small business by referring to small business in the name of the concession, it is not clear why as medium to large businesses will probably claim as much if not more of the investment as would small businesses.
Can I claim the investment allowance on cars and other motor vehicles?
Yes, cars are eligible, except for cars that are using the cents per kilometre method of claiming tax deductions for the car. This is different to previous investment allowances, which excluded motor vehicles. Does it apply to luxury cars?
Yes, except the cost on which the investment allowance can be claimed will be the luxury car limit.
Can I claim on acquisition of second hand assets?
No, the investment allowance is generally only available for the cost of new assets or cost of improving existing assets.
Does it apply to new assets for use in a rental property?
No, the assets must be used in Australia in carrying on a business. Taxpayers with rental properties are usually not considered to be carrying on business (there may be some exceptions where the property holding activities are extensive).
Can I claim on acquisition of computer software?
No, intangible assets such as computer software are specifically excluded. It also excludes capital works, such as land and buildings, and trading stock.
If I buy a number of the same assets that individually cost less than the asset value threshold but in total exceed it are they eligible for the investment allowance?
No. The asset value threshold applies on a per asset basis.
Can I claim the investment allowance on a car that uses the 12% of cost method or other assets that are depreciated under the small business pooling method or under the R&D concessions?
Yes, these items are specifically included as eligible.
If I use the asset only partially for business purposes can I claim the investment allowance on the whole cost?
Yes, provided you install it ready for use in Australia for the principal purpose of carrying on a business (principal purpose would generally mean more than 50%). This is a change to the Treasurer’s press release on 12 December 2008, when he stated the investment allowance will be available "to the extent that the asset will be used for a taxable purpose in carrying on a business". The draft legislation does not include this restriction and the explanatory memorandum specifically states that the reduction for non-business use will not apply.
If I dispose of the asset or stop using it principally for business use within 12 months will there be any claw back of the investment allowance?
No, unlike previous investment allowances, there will be no claw back in these circumstances.
Summary of draft legislation
Below is a summary of the draft legislation for the investment allowance.
New Div 41
The exposure draft introduces new Div 41. In order to determine whether an asset qualifies for the investment allowance, it is necessary to consider whether:
- The asset is a depreciating asset
- The asset is a qualifying asset
- You are entitled to a deduction under s 40-25
- You are using the asset for a qualifying purpose
- You have incurred sufficient expenditure on the asset
- You satisfy the timing requirements.
The asset must be a depreciating asset. Land and trading stock are specifically excluded from depreciating assets, as are assets covered by Subdiv 40-F, 40-G and 40-J (primary production and carbon sink forests). Intangible assets are specifically excluded from the operation of Div 41, as are buildings which are deductible under Div 43.
There are also several classes of assets which are included in Div 41 which are not covered by Div 40:
- A car where you use the "12% of original value method" to claim deductions
- All assets under the small business entity pooling rules in Div 328
- Assets used for qualifying research and development which are depreciated under s 73BA of ITAA 1936.
| Eligible | Not Eligible |
| Tangible, depreciating assets for which a deduction is available under s 40-25 of the ITAA 1997 such as: – machinery – equipment – cars – except those using the "cents per kilometre" method |
Intangible assets, such as: – computer software – intellectual property rights |
| Tangible, depreciating assets used by small business entities | Cars using the "cents per kilometre" method |
| Tangible, depreciating assets used in R&D | |
| Land | |
| Trading stock | |
| Horticultural plants, establishment costs of carbon sinks | |
| Capital works – buildings, construction expenditure |
Qualifying asset
The asset must be a qualifying asset. The asset must either:
- be new, i.e. not second hand, or
- involve improvements or additions to existing assets.
Where there is a pre-existing asset and expenditure is undertaken to improve the asset, that expenditure will qualify for the allowance where the expenditure would be included in the second element of the asset’s cost for Div 40 purposes.
Are you entitled under s 40-25?
To be entitled to claim the investment allowance, you must be the holder of the asset in accordance with s 40-40. This will usually mean the owner of the asset but there are some exceptions, for example, the lessor (owner) of a leased luxury car is not the holder, the lessee is taken to be the holder instead. Where the asset is covered by a hire purchase arrangement, the hirer will be entitled to the allowance.
You use the asset for a qualifying purpose
To be entitled to the allowance, you must use the asset for the principal purpose of carrying on a business. This means:
- Use of the asset for non-business, but income producing purposes is not sufficient
- At the time the asset starts to be used or is installed ready for use the principal (or main) purpose for which it is to be used is in carry on a business.
There is no clawback of the allowance. If the asset is later sold, no amount is included in assessable income. Similarly, if the asset is subsequently used for non-business purposes, no amount is included in assessable income.
Sufficient expenditure
The rules regarding the required level of expenditure have not changed. For small business entities (Div 328 definition), the required level of expenditure on individual assets is a minimum of $1,000. For all other businesses, the minimum level is $10,000.
As noted in the explanatory memorandum, to qualify for the $1,000 threshold, the taxpayer must be a small business entity in the year they make the investment, use the asset or claim the allowance. An example is given of a taxpayer which is a small business entity when the asset is purchased, but by the time it is installed and the allowance is claimed, the taxpayer is no longer a small business entity. The taxpayer continues to be entitled to the $1,000 threshold.
The draft Bill specifies that the threshold applies to each asset. The explanatory memorandum explicitly states investments in multiple, different assets will not be amalgamated for the purposes of meeting the threshold. However, multiple amounts incurred in relation to the same asset can be amalgamated.
Timing requirements
The timing requirements for the ordering and installation of qualifying assets have not changed.
To qualify for the 30% allowance, you must contract to acquire the asset (or commence construction) between 13 December 2008 and 30 June 2009. In addition, the asset must be used (or installed ready for use) by 30 June 2010.
Where the asset is contracted (or construction commences) prior to 30 June 2009, but it is used (or installed ready for use) between 1 July 2010 and 31 December 2010, you will be entitled to a 10% allowance.
Where the asset is contracted (or construction commences) between 1 July 2009 and 31 December 2009, and it is used (or installed ready for use) before 31 December 2010, you will be entitled to a 10% allowance.
This table from the explanatory memorandum summarises the availability of the allowance:
| NEW INVESTMENT BY: | ||
| INSTALLED BY: | 30 June 2009 | 31 December 2009 |
| 30 June 2009 | 30% in 2008/09 | |
| 30 June 2010 | 30% in 2009/10 | 10% in 2009/10 |
| 31 December 2010 | 10% in 2010/11 | 10% in 2010/11 |
There are integrity provisions which prevent taxpayers from renouncing contracts (or recommencing construction) which occurred prior to 13 December 2008 for the purpose of refreshing the contract (or the construction) after 13 December 2008 to provide access to the investment allowance.
What is your entitlement?
Where you satisfy all the requirements of the allowance, you claim the allowance in the income tax return for the year in which the asset is first used or installed ready for use. The allowance is in addition to any depreciation claimed.
Where the asset is a new asset, the applicable percentage (10% or 30%) is applied against the first element of the asset’s cost (acquisition cost excluding GST where the taxpayer is entitled to input tax credits) and any second element costs (costs incurred in installing the asset and any additional costs).
Where the expenditure is an improvement to an existing asset, the applicable percentage is applied against the second element costs incurred within the applicable dates.
Where the asset is a car, the luxury car limit will apply. This limits the allowance available to acquisitions of cars which exceed the luxury car limit ($57,180 for the 2009 year) to the luxury car limit.
The contents of this paper are for general information only. They are not intended as professional advice and you should consult a chartered accountant or other suitably qualified professional. PKF expressly disclaims all liability for any loss or damage arising from reliance upon any information in this paper.
Source: CCH Tax Week, Issue 10, 12 March 2009
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