INVESTMENT ALLOWANCE GUIDE - eknowhow · Advanced Tax & Business Services is an excellent program...

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INVESTMENT ALLOWANCE GUIDE May 2009 Updated for the 2009/2010 Federal Budget

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Contents Access full-time accounting support at a part-time cost ................................................................................. 4

Upcoming Knowledge Shop events ................................................................................................................. 5

Performance management, appraisals and reviews training.................................................................. 5

Super-ssentials 2009 ............................................................................................................................... 5

Advanced Tax & Business Services .......................................................................................................... 6

CGT in Practice ........................................................................................................................................ 6

Practical application of the Investment Allowance ......................................................................................... 7

Background .................................................................................................................................................. 7

F.DED 10.10.10 Investment Allowance eligibility flowchart* ................................................................. 8

General overview of the Investment Allowance .......................................................................................11

Example – Purchase and upgrade of the same asset ............................................................................12

Investment Allowance: The seven eligibility criteria .............................................................................13

Anti-avoidance/claw-back provision .....................................................................................................14

Example – Failure of the purpose test ..................................................................................................14

Partnerships ..........................................................................................................................................15

Novated Leases .....................................................................................................................................15

Eligibility criteria 1 – The purpose test ..................................................................................................16

Example 1.1 – Asset used over 50% in the business .............................................................................16

Example 1.2 – Asset purchased before business commenced ..............................................................17

Example 1.3 – Asset purchased for use in a different activity to the current business ........................17

Example 1.4 – Asset not used in a business ..........................................................................................18

Eligibility criteria 2 –Asset must be a ‘tangible’ asset that is eligible for a depreciation deduction under Division 40 ITAA 1997 .................................................................................................................18

Example 2.1 – Software not eligible ......................................................................................................19

Example 2.2 – Capital works not eligible ...............................................................................................19

Example 2.3 – Caravan park (depreciable asset or capital works) ........................................................19

Example 2.4 – Leasehold improvements...............................................................................................21

Example 2.3 – Cars and the Investment Allowance ..............................................................................22

Eligibility Criteria 3 – Asset must be ‘new’ ............................................................................................23

Example 3.1 – Demonstrator car ...........................................................................................................23

Example 3.2 – Asset purchased after initial testing ..............................................................................23

Eligibility criteria 4 –Asset cannot be eligible for a deduction under Subdivision 40-F, Subdivision 40-G or Subdivision 40-J ITAA 1997 ...............................................................................................................24

Example 4.1 – Asset depreciable under Division 40-F ...........................................................................24

Eligibility Criteria 5 – The cost requirement ..........................................................................................25

Example 5.1 – Identical/substantially identical .....................................................................................25

Example 5.2 – Marketed/intended to be used as a set and identical/substantially identical ..............25

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Example 5.3 – Sold/marketed as part of a set ...................................................................................... 26

Example 5.4 – Different assets used in similar setting ......................................................................... 26

Example 5.5 – Different assets, similar use .......................................................................................... 26

Example 5.6 – Identical/substantially identical and SBE pooling ......................................................... 27

Example 5.8 – Repairs to assets not eligible......................................................................................... 27

Example 5.9 – Luxury cars .................................................................................................................... 28

Example 5.10 – Amounts incurred over two income years .................................................................. 28

Eligibility Criteria 6 – The investment commitment requirement ........................................................ 28

Example 6.1 – Entering into a contract ................................................................................................ 29

Example 6.2 – Purchase of asset with deposit ..................................................................................... 29

Example 6.3 – Constructing own asset ................................................................................................. 30

Eligibility criteria 7 – The first use/installed ready for use requirement .............................................. 31

Example 7.1 – 30% deduction in 2008/09 ............................................................................................ 31





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Knowledge Shop ....................................................................................................................................... 34

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The information contained in the Investment Allowance Guide is current at the time of printing. Please ensure that you check any of the materials provided for currency before utilising. The information contained herein is provided on the understanding that it neither represents nor is intended to be advice or that the authors or distributor is engaged in rendering legal or professional advice. Whilst every care has been taken in its preparation no person should act specifically on the basis of the material contained herein. If expert assistance is required competent professional advice should be obtained. The material contained in The Investment Allowance Guide should be used as a guide in conjunction with professional expertise and judgement. All responsibility for applications of The Investment Allowance Guide and for the direct or indirect consequences of decisions based on The Investment Allowance Guide rests with the user. Knowledge Shop Pty Ltd, directors and authors or any other person involved in the preparation and distribution of this information, expressly disclaim all and any contractual, tortious or other form of liability to any person in respect of The Investment Allowance Guide and any consequences arising from its use by any person in reliance upon the whole or any part of the contents of this Guide. All rights reserved. No part of this guide may be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording or by information storage or retrieval system, other than specified without written permission from Knowledge Shop Pty Ltd. Knowledge Shop Pty Ltd Level 2, 115 Pitt St, Sydney Phone: 1800 800 232

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Upcoming Knowledge Shop events

Performance management, appraisals and reviews training

Performance management, appraisals & reviews training is a one day program that gives you the essential skills and techniques for managing performance and undertaking performance reviews and appraisals in accounting firms.

A full workbook is included that gives you the performance review work papers, job descriptions with KPIs for key accounting roles, and performance management templates you need.

Presented by registered psychologist and professional services management specialist Scott Henderson, this is a training day not to be missed by anyone who manages people or those on the management fast track.

Sydney Wednesday, 27 May Macquarie Graduate School of Mgt, Sydney

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Super-ssentials 2009

Back by popular demand Super-ssentials is the complete one day training day covering the key areas for SMSFs auditors and advisers. Then, we give you all of the documentation you need to manage the audit of SMSF inside your practice including the engagement letters, audit plan, financial statement and SIS compliance audit program, trustee representation letter, and more. And, our experienced presenters will show you how to work with SMSF from the compliance requirements through to advice on tax treatments and SIS implications. Auditors are now in the spotlight like never before. The regulators have lifted the bar and have higher expectations of the application of the audit standards for SMSF. This program demystifies what is expected and counts toward the competency requirements. Plus, we’ll take you through the ATOs ‘audit the auditor’ process. Designed for Senior’s through to Partners, Super-ssentials is a very practical program. It uses real life examples and case studies to test and develop your thinking. Melbourne Tuesday, 9 June Rendezvous Hotel, Melbourne

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To register, call us on 1800 800 232 or visit www.knowledgeshop.com.au

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Sydney Wednesday, 29 July Swissotel Sydney

Melbourne Wednesday, 5 August Rendezvous Hotel, Melbourne


CGT in Practice

Essential, practical and technically advanced, Working with CGT is a must attend training day for any practitioner. Presented in a practical, case study driven format, ATAX’s Professor Chris Evans and Knowledge Shop’s Michael Carruthers deliver the best of the technical detail combined with real life client scenarios.

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© Knowledge Shop Pty Ltd | Practical application of the Investment Allowance 7

Practical application of the Investment Allowance

NOTE: This material is based on Tax Laws Amendment (Small Business and General Business) Bill 2009 and measures announced in the 2009/2010 Federal Budget. At the time of printing, the Bill had not been enacted and may be subject to change. The Bill does not contain the measures announced by the Government in the 2009 Budget and it is not clear how the Government intends to legislate these amendments. The focus of this Guide is to:

1. Provide an outline of what assets are and are not eligible for the 50%, 30% and 10% Investment Allowance;

2. Provide guidance on how and when the Investment Allowance can be claimed (eligibility and the

amount claimable depends on the timing of the purchase/additional investment and the first use of the asset); and

3. Provide practical examples of common situations where the Investment Allowance can and

cannot be accessed.

This guide follows the structure of F.DED 10.10.10 Investment Allowance eligibility flowchart for SBEs and F.DED 10.10.20 Investment Allowance eligibility flowchart for non-SBEs (see over the page). Broadly speaking, there are seven eligibility criteria that determine whether the taxpayer may claim the 50%, 30% or 10% Investment Allowance. At each eligibility criteria in the flowchart there is a reference to further information (including real life examples) to enable you to assess the client’s situation against the particular eligibility criteria.

Background

As part of its response to the international and domestic economic crisis, the Federal Government announced a temporary ‘tax break’ for businesses that purchase certain assets between 12.01 am on 13 December 2008 and 11.59pm on 31 December 2009 (see Investment Allowance to Boost Business Investment announced 12 December 2008 by Treasurer Wayne Swan). This temporary ‘tax break’, commonly referred to as the Investment Allowance, is claimed as an added depreciation deduction in the year the asset is first used or is installed ready for use. The new rules insert Division 41 into the Income Tax Assessment Act 1997 that allow an extra depreciation deduction (depending on when the asset is acquired and installed ready for use) on top of the normal depreciation deduction calculated for the asset under Division 40. At the time of printing, Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 that gives effect to the Investment Allowance had not yet passed Parliament. The Bill was introduced into the House of Representatives on 19 March 2009 having previously been released for public comment on 25 February 2009. An extension to the Investment Allowance for small business was also announced by the Federal Government in its 2009 Budget on 12 May 2009.


F.DED 10.10.10 Investment Allowance eligibility flowchart for small business entities*

Did the taxpayer use (or do they intend to use) the

asset in a business that is (or will be) carried-on in

Australia1?

Did the taxpayer enter into a contract to buy5 the asset (or make the improvement

to the existing asset) between 12.01am 13/12/08

and 31/12/09?

Was the asset only used for ‘reasonable’ trialling and

testing? (e.g. held for demonstration by a car dealer?

Has the asset been used or is installed ready for use by

31/12/2010?

The Investment Allowance

is not available

No No

Yes

No Is the new asset (or asset to which the improvement is made) a tangible asset to which a deduction under Division 40 ITAA 1997 can

be claimed?

No

No

Is the asset eligible for a deduction under Subdivision

40-F, Subdivision 40-G or

Subdivision 40-J ITAA 19973?

Has the asset previously been ‘used’2 by another

entity?

No Yes

The 50% investment

allowance is available

Yes

No

No

Yes

Yes Did the asset (or the

improvement to the existing asset) cost more than $1,000

(GST exclusive)?4

Yes

Yes

Yes

1 2 3

3

4 5

6

7

http://law.ato.gov.au/atolaw/view.htm?rank=find&act=pac%2F19970038%2F%3F~Income%20Tax%20Assessment%20Act%201997%20(38%20of%201997)&criteria=AND~pac%2F19970038%2F%3F~provid~exact&target=pac/19970038/?&style=java&sdocid=PAC/19970038/40-1&recStart=361&PiT=999


http://law.ato.gov.au/atolaw/view.htm?rank=find&act=pac%2F19970038%2F%3F~Income%20Tax%20Assessment%20Act%201997%20(38%20of%201997)&criteria=AND~pac%2F19970038%2F%3F~provid~exact&sis=40-G&target=pac/19970038/?&style=java&sdocid=PAC/19970038/40-630&recStart=

http://law.ato.gov.au/atolaw/view.htm?rank=find&act=pac%2F19970038%2F%3F~Income%20Tax%20Assessment%20Act%201997%20(38%20of%201997)&criteria=AND~pac%2F19970038%2F%3F~provid~exact&sis=40-J&target=pac/19970038/?&style=java&sdocid=PAC/19970038/40-1000&recStart


F.DED 10.10.20 Investment Allowance eligibility flowchart for non-small business entities*

Did the taxpayer use (or do they intend to use) the

asset in a business that is (or will be) carried-on in

Australia1?

Did the taxpayer enter into a contract to buy5 the asset (or make the improvement

to the existing asset) between 12.01am 13/12/08

and 30/06/09?

Was the asset only used for ‘reasonable’ trialling and

testing? (e.g. held for demonstration by a car dealer?


30/06/2010?

The Investment Allowance

is not available

No No

Yes

No Is the new asset (or asset to which the improvement is made) a tangible asset to which a deduction under Division 40 ITAA 1997 can

be claimed?

Did the taxpayer enter into a contract to buy5 the asset (or make the improvement to the existing asset) before

31/12/2009?

No

No

Is the asset eligible for a deduction under Subdivision

40-F, Subdivision 40-G or

Subdivision 40-J ITAA 19973?

Has the asset previously been ‘used’2 by another

entity?

No Yes

The 10% Investment Allowance is available (but

not the 30%)

The 30% Investment

Allowance is available

Yes

No

Yes

No

Yes

Yes

No

Did the asset (or the improvement to the existing

asset) cost more than

$10,000 (GST exclusive)?4


31/12/10?

No

Yes

Yes

Yes

Yes

1 2 3

3

4 5

6

6

7 7



http://law.ato.gov.au/atolaw/view.htm?rank=find&act=pac%2F19970038%2F%3F~Income%20Tax%20Assessment%20Act%201997%20(38%20of%201997)&criteria=AND~pac%2F19970038%2F%3F~provid~exact&sis=40-G&target=pac/19970038/?&style=java&sdocid=PAC/19970038/40-630&recStart=

http://law.ato.gov.au/atolaw/view.htm?rank=find&act=pac%2F19970038%2F%3F~Income%20Tax%20Assessment%20Act%201997%20(38%20of%201997)&criteria=AND~pac%2F19970038%2F%3F~provid~exact&sis=40-J&target=pac/19970038/?&style=java&sdocid=PAC/19970038/40-1000&recStart

10 Practical application of the Investment Allowance | © Knowledge Shop Pty Ltd 2009

Notes attaching to F.DED 10.10.10 and F.DED 10.10.20 Investment Allowance flowcharts *The flowcharts are based on Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009 introduced into Parliament on 19 March 2009 and announcements made by the Government in the 2009 Federal Budget on 12 May 2009. The legislation and Budget announcements are not yet law. Note 1: To qualify for the Investment Allowance, the entity seeking to claim the allowance must use (or intend to use) the particular asset in a business carried-on in Australia. Where the entity intends to use the asset in a business carried-on in Australia, you look at this intention at the first time the asset is used or is installed ready for use (must be reasonable to conclude that the asset will be used in a business carried-on in Australia). The asset must be used ‘primarily’ in that business i.e. some private use is allowable (as long as it is still used ‘primarily’ in the business). Note 2: The term ‘used’ is not limited to instances where the asset has been used in a business i.e. if the asset has previously been used for private purposes or to derive assessable income from an activity that is not a business (e.g. rental property), the asset will not be eligible for the 30% or 10% Investment Allowance (unless the ‘reasonable’ trialling and testing exception applies). Note 3: We note that assets that are eligible for R&D deductions and SBE pooling deductions can still be eligible for one of the Investment Allowance. It is only those Div 40 assets eligible for further deductions under Subdivisions F, G and J (as well as intangible assets) that are not eligible. Note 4: If more than one asset is purchased between 13/12/08 and 31/12/09 then for the purposes of determining whether the ‘cost’ of the asset exceeds the minimum cost thresholds ($1,000 for SBE’s, $10,000 for other entities), the cost of identical (or substantially identical) assets and assets that are designed to be used together can be added together. For example, if four identical chairs are purchased between 13/12/08 and 31/12/09, each costing $600, the cost of these four can be aggregated for the purposes of the Investment Allowance. Further, if a set of 6 walkie-talkies that are not identical but are designed to be used together (each costing $400) are purchased, the cost can be aggregated for the purposes of the Investment Allowance. Please note that if the car is a ‘luxury’ car (i.e. cost exceeds the luxury car limit), the Investment Allowance will be worked out in regard to this luxury car limit (not the actual amount paid for the car). Note 5: The Investment Allowance can be claimed by the entity that ‘holds’ the asset for Div 40 purposes. This usually means the legal owner of the asset although, in some circumstances, the economic owner of the asset will ‘hold’ it for Division 40 purposes. For example, the person leasing an asset under a hire purchase agreement and some finance lease arrangements (where it is likely the lessee will purchase the asset) will ‘hold’ the asset for Division 40 purposes and will be able to claim the Investment Allowance for an eligible asset. However, lessees under an operating lease will not be able to claim the Investment Allowance.


General overview of the Investment Allowance

The Investment Allowance can apply to a ‘recognised investment amount’ (section 41-20 of Tax Laws Amendment (Small Business and General Business) Bill 2009) made between 12.01am 13 December 2008 and 11.59pm 31 December 2009. The ‘recognised investment amount’ can be made up of amounts that are added to the first or second element of the ‘cost’ of an asset i.e. the purchase of a new asset, the construction of a new asset or further investment in an existing asset. Whether the ‘recognised investment amount’ is part of the first or second element of the cost of an asset, the asset must be used in a business carried-on in Australia. Assets purchased after 12.01am 13 December 2008 can be eligible for the Investment Allowance for both the initial cost of the asset (i.e. the first element of cost) or for the cost of additional investment (i.e. the second element of cost) made in relation to the asset between 12.01am 13 December 2008 and 11.59pm 31 December 2009. Assets that are constructed by an entity (first element of cost) between 13 December 2008 and 31 December 2009 can also be eligible for the Investment Allowance (provided the other conditions are met). Assets purchased before 12.01am 13 December 2008 can be eligible for the Investment Allowance if additional investment is made in relation to the asset (i.e. addition to the second element of the asset’s cost) between 12.01am 13 December 2008 and 11.59pm 31 December 2009. There are three different Investment Allowance rates that may apply (50%, 30% and 10%). The particular Investment Allowance rate will depend upon:

The time the commitment to purchase (or make the additional investment in) the asset is made;

The time the asset is first installed ready for use; and

Whether the taxpayer is a small business entity. The following tables set out the different Investment Allowance rates that can be claimed in different circumstances:

1. Taxpayers that are not small business entities

Commitment to buy the asset made by....

Installed ready for use 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


2. Taxpayers that are small business entities


Installed ready for use by... 31 December 2009

30 June 2009

50% in 2008-09

30 June 2010

50% in 2009-10

31 December 2010

50% in 2010-11

If the asset in question is eligible for the Investment Allowance, the relevant Investment Allowance (50%, 30% or 10%) is calculated based on the first element of the asset’s cost (for the acquisition of assets) or the second element of the asset’s cost (for additional investment in the asset).

Example – Purchase and upgrade of the same asset

Invest Co (not a small business entity) purchases a new tractor in February 2009 for $80,000 for use in its farming business. The tractor is first delivered and used on the farm in June 2009. In July 2009 (after a couple of weeks of use), Invest Co spends $15,000 on some modifications to the tractor as well as an additional shovel for the tractor (to better adapt the tractor for use in the Invest Co business). In this case, both the initial $80,000 cost and the $15,000 modification will be eligible for the Investment Allowance. In the 2008/09 income year, Invest Co will be able to claim the 30% Investment Allowance in relation to the cost of the tractor (i.e. $24,000 additional deduction). In the 2009/10 income year, Invest Co will be able to claim the 10% Investment Allowance in relation to the modifications done to the tractor (i.e. $1,500 additional deduction).

There is currently no mention that the Investment Allowance deduction cannot give rise to or increase a tax loss. The Investment Allowance can apply to assets purchased overseas provided they are used in a business carried-on in Australia (and the other eligibility criteria are met in relation to the asset). The ability to claim the 50%, 30% or 10% Investment Allowance will depend upon the taxpayer meeting seven eligibility criteria outlined in the following table:


Investment Allowance: The seven eligibility criteria

1. The purpose test The taxpayer claiming the tax break must intend, at the time the asset is first used or installed ready for use, to use the asset in a business carried-on in Australia.

2. Asset must be a ‘tangible’ asset that is eligible for a depreciation deduction under Division 40 ITAA 1997

The Investment Allowance cannot apply to the purchase of software or other intangible assets such as licenses, patents etc

3. The asset must be ‘new’ The asset cannot have been used previously either for private or business purposes (unless the prior use of the asset was only for reasonable testing and trialling e.g., a car held for demonstration by a car dealer).

4. Asset cannot be eligible for a deduction under Subdivision 40-F, Subdivision 40-G or Subdivision 40-J ITAA 1997.

If the asset is eligible for a deduction under one of these subdivisions, you cannot claim the Investment Allowance (you cannot elect out of the subdivisions to claim the Investment Allowance).

5. The cost requirement If the entity claiming the Investment Allowance is a Small Business Entity (SBE), the asset must ‘cost’ at least $1,000 (GST exclusive). If the entity claiming the tax break is not an SBE, the asset must ‘cost’ at least $10,000 (GST exclusive).

6. The investment commitment requirement To be eligible for the 30% Investment Allowance, non-SBEs must have entered into a contract to buy/construct the asset (or make the additional investment in the asset) between 12.01pm 13/12/2008 and before 1 July 2009. To claim the 10% Investment Allowance, non-SBEs must have entered into a contract to buy/construct the asset (or make the additional investment in the asset) between 12.01pm 13 December 2008 and before 1 January 2010. To be eligible for the 50% Investment Allowance, SBEs must have entered into a contract to buy/construct the asset (or make the additional investment in the asset) between 12.01pm 13/12/2008 and before 1 January 2010.

7. The first use/installed ready for use requirement To be eligible for the 30% Investment Allowance in the 2008/09 income year, non-SBEs must have used the asset or had the asset installed ready for use by 30 June 2009. To be eligible for the 30% Investment Allowance in the 2009/10 income year, non-SBEs must have used the asset or had the asset installed ready for use by 30 June 2010. To be eligible for the 10% Investment Allowance, non-SBEs must have used the asset or had the asset installed ready for use by 31 December 2010. To be eligible for the 50% Investment Allowance, SBEs must have used the asset or had the asset installed ready for use by 31 December 2010.


Anti-avoidance/claw-back provision

There are no specific ‘anti-avoidance’ provisions in the Bill that brings in the Investment Allowance. However, one paragraph from the Explanatory Memorandum does indicate that the ATO will seek to claw back the claimed Investment Allowance in some circumstances. Paragraph 1.119 of the Explanatory Memorandum reads as follows:

“The Tax Break will not be clawed back for any subsequent non-business use of the asset or if the asset is subsequently disposed of provided that the purpose test was genuinely satisfied at the time the taxpayer started to use the asset or had it installed ready for use.”

As there are no specific anti-avoidance provisions in the Bill, the ATO will look to apply Part IVA to situations where it deems there to be a ‘scheme’ set up primarily for the purpose of claiming the Investment Allowance. Please note that there is very little guidance on how the ATO is likely to apply Part IVA to claims made under the Investment Allowance provisions however it is likely that the main risk areas in this regard are situations where the asset is either:

Not used primarily in a business; or

The asset is purchased, the Investment Allowance is claimed and then the asset is sold a short time later for an amount close to the purchase price where there was no genuine business use.

Example – Failure of the purpose test

John runs a boat repair business and is not a small business entity. He purchases a new boat in May 2009 for $100,000 that will be used 80% in a charter business and 20% for personal use that he intends to start. The new boat is first used in May 2009 for personal use and is first used in the charter business in July 2009. John claims the 30% Investment Allowance in the 2008/09 income year. In setting up the charter business, John did not construct a detailed business plan, marketing plan or do other things that would be considered standard practise when setting up a new business (i.e. did not register a business name, no website etc). Further, the boat was purchased by borrowing an amount from the bank on a short term loan i.e. the loan documents indicate that the purpose of the loan was for the purchase of the boat for re-sale. John only ran a handful of charter trips for his friends and relative at below market value rates. John then sold the boat in September 2009 for $90,000. It is likely that the ATO would seek to apply Part IVA to this situation to disallow/claw-back the 30% Investment Allowance claim in the 2008/09 income year on the basis that John fails the purpose test in relation to the boat.


Partnerships

Where an asset is deemed to be ‘held’ by the partnership under Division 40 ITAA 1997, the partnership is entitled to claim the Investment Allowance in relation to the asset (providing the other requirements are satisfied). The asset can be ‘held’ by a partnership if it is either:

Owned by the partnership; or

Owned by one or more of the individual partners but is used in such a way (and is treated in such a way under the partnership agreement) that the asset is considered to be a partnership asset.

ATO ID 2003/439 provides further information regarding assets that are considered partnership assets. If the asset is not ‘held’ by the partnership and is owned (legally and economically) by the individual partner, the individual partner can claim the Investment Allowance in relation to the asset provided they satisfy the other requirements in relation to the Investment Allowance. From a practical point of view, general partnership law considers that a partner in a partnership is carrying-on their own ‘business’ provided the partnership is actually carrying-on a business (i.e. partners to a general law partnership are themselves carrying-on a business while partners to a tax law partnership are not necessarily). Therefore, if a person is a partner in a general law partnership that is carrying on a business then they may be able to claim the Investment Allowance in relation to assets they use in the partnership business even though the asset is not a partnership asset. Support for this view comes from Tax Laws Amendment (2009 Measures No. 2) Bill 2009 that will bring in amendments to the small business CGT concessions. Comments from this Bill indicate that partners in a partnership are held to be carrying-on a business (as a partner in the partnership).

Novated Leases

Under a standard novated lease in relation to a motor vehicle, the employer will meet the repayments under the leasing arrangement while the third party will retain ownership of the vehicle. Therefore, under a standard novated lease, there will not be an expectation that the employer will acquire the vehicle at the end of the lease i.e. not expected to pay-out the residual. As there is no expectation that the employer will purchase the vehicle and the employee is not the economic or legal owner of the vehicle, the ATO’s view is that neither the employer or the employee ‘holds’ the asset for Division 40 ITAA 1997 purposes. This means that neither the employer nor the employee will be eligible for the Investment Allowance in respect of a vehicle that is the subject of a standard novated lease. The exception to this is where the vehicle is a luxury car i.e. if the vehicle has a cost exceeding $58,170 for the year ending 30 June 2009, the employer is held to have ‘acquired’ the car under Division 42A Schedule 2E ITAA 1936. Therefore, a luxury car that is the subject of a novated lease can be eligible for the Investment Allowance however, in most cases, a vehicle that is not a luxury car that is subject to a novated lease will not. See TR 1999/15 for the ATO’s view on the tax consequences of novated leases.

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Eligibility criteria 1 – The purpose test

To claim the Investment Allowance, the taxpayer must be able to demonstrate that at the time they started to use the asset or had it installed ready for use, it was reasonable to conclude that the asset was to be principally used in Australia for the purpose of carrying on a business in Australia (see section 41-20(1)(d)). The Investment Allowance will not be apportioned for any non-business use i.e. the asset either qualifies for the whole Investment Allowance or it doesn’t. The Bill requires that the asset is used ‘for the principal purpose of carrying on a business’: see section 41-20(1)(d). If the asset is used ‘for the principal purpose of carrying-on a business’ (i.e. over 50%) then the full Investment Allowance is claimable. This means that the Investment Allowance is not limited to the business use of the asset (as is the case when calculating depreciation deductions under Division 40 ITAA 1997).

Example 1.1 – Asset used over 50% in the business

John runs a charter boat business as a sole trader and is a small business entity. He purchases a new boat in May 2009 for $100,000 that will be used 80% in his charter business and 20% for personal use. The new boat is first used in the charter business in June 2009. The standard depreciation deduction for this boat for the 2008/09 income year would be based on the business use (80%) and the number of days it was ‘used’ in the income year (June 2009). John will be entitled to claim the full 50% Investment Allowance in relation to the new boat in the 2008/09 income year (i.e. $50,000 additional depreciation deduction) as the boat is used for the principal purpose of carrying on a business.

The asset may be purchased for use in a business that was not operating at the time of purchase i.e. it can be acquired for a future business. However, the person claiming the tax break needs to show that, at the time the asset was first used or installed ready for use for any purpose, it is reasonable to conclude the taxpayer will use the asset in a business carried-on in Australia: see section 41-20(1)(d) and section 41-20(1)(d).


Example 1.2 – Asset purchased before business commenced

John was intending to start a charter boat business towards the end of 2009. In May 2009 he purchases a boat that will be used in this charter business. John has prepared a thorough business plan and has raised funds for the commencement of the business. John takes delivery of the boat at the end of May 2009 and uses the boat to familiarise himself with the charter routes (as well as some personal use). The charter business does not commence until August/September 2009. As John entered into the contract to purchase the boat before 30 June 2009 and had it installed ready for use before that date (even though it was not yet used in the business), John can claim the Investment Allowance in the 2008/09 income year provided it is ‘reasonable to conclude’ that John will use the asset principally in the charter business. This will depend upon whether John is genuinely intending to start the charter business (depends on the facts). NOTE: This example is based upon the fact that ‘first use time’ as defined in the Bill is based upon the first use or installation ready for use for any purpose i.e. it is not a current requirement that the use or installation ready for use is for a taxable purpose. Please see section 41-30 of the Bill.

The asset does not need to be used in the current activity carried-on by the taxpayer i.e. it can be used in a business activity not currently commenced provided, at the time it is first used or installed ready for use, it is reasonable to conclude that it will be used for the principal purpose of carrying on a business in Australia.

Example 1.3 – Asset purchased for use in a different activity to the current business

John currently runs a boat repair business at the local marina. He is considering purchasing 2 boats to begin a charter boat business. Provided the boats are used primarily in this business (and the other conditions are met), the taxpayer will be able to claim the investment allowance in relation to the boats in the year they are first used or installed ready for use.

It is important to note that assets acquired that are used in the derivation of income that is not a business will not be eligible for the Investment Allowance (such as a rental property).


Example 1.4 – Asset not used in a business

John owns a rental property. He spends $20,000 on kitchen renovations before 30 June 2009 that includes the purchase of a new stove ($2,500) and fridge ($1,200). None of the expenditure incurred will be eligible for the investment allowance as John is not carrying-on a business (simply deriving rental income from the one property).

Eligibility criteria 2 –Asset must be a ‘tangible’ asset that is eligible for a depreciation deduction under Division 40 ITAA 1997

To claim the Investment Allowance, the asset in question must be an asset that can be depreciated under Division 40 ITAA 1997 (subject to certain exceptions). Some assets that are depreciable under Division 40 (such as intangibles) are not eligible for the Investment Allowance. The following assets are NOT eligible for the Investment Allowance on the basis that they are either not depreciable under Division 40 ITAA 1997 or they have been specifically excluded from being eligible for the Investment Allowance:

Land

Buildings

Capital works expenditure

Trading stock

Patents

Registered designs

Copyrights

Licenses

In-house software

All the other assets listed in section 40-30(2) ITAA 1997 and section 40-95(7) ITAA 1997

Water facilities

Horticultural plants

Cars using the ‘cents per kilometre’ method. However, some assets that are not depreciated under Division 40 ITAA 1997 may still be eligible for the Investment Allowance, being:

Cars for which a car expense deduction is claimed under the ’12 per cent of original value’ method under Division 28 ITAA 1997;

Assets that are depreciated by a small business entity under Subdivision 328-D ITAA 1997; and

Tangible assets that receive a deduction under the research and development provisions.


Example 2.1 – Software not eligible

Example from page 10 of the Explanatory Memorandum of the Bill Annie operates a bakery. On March 10 2009, she acquires a coffee machine, a new computer and some software. The coffee machine and computer are both tangible, depreciating assets. Annie may be able to claim the Investment Allowance in relation to these assets if all other criteria are satisfied. However the software is an intangible asset and is therefore not eligible for the Investment Allowance.

If software is purchased along with the acquisition of a computer (i.e. already installed), the computer will still be eligible for the Investment Allowance provided the other requirements are met.

Example 2.2 – Capital works not eligible

Example from page 11 of the Explanatory Memorandum of the Bill. From example above, Annie also decides to build an extension on to her bakery to provide more space for customers to sit and eat. Annie is able to claim a deduction under Division 43 ITAA 1997 for the expense of constructing the extension and so this expenditure would not be eligible for the Investment Allowance.

Example 2.3 – Caravan park (depreciable asset or capital works)

Roger owns a Caravan/Holiday Park and is looking to purchase the following items for use in this Caravan/Holiday park business:

Cabin (re-locatable);

Site infrastructure (i.e. underground electricity, water, sewerage etc to cabin);

Above ground Spa; and

In ground swimming pool. He has asked your advice as to whether the expenditure listed above could be eligible for the Investment Allowance. Suggested answer Expenditure that qualifies for a deduction under the capital works provisions in Division 43 would not qualify for the Investment Allowance. Under the Bill, one of the main conditions to be eligible for the tax break is that the taxpayer is entitled to depreciation deductions under section 40-25 ITAA 1997 in relation to the expenditure. Section 40-45 confirms that depreciation deductions are not available for capital works that can be deducted under Division 43. Buildings and structural improvements normally fall within the scope of the capital works rules in Division 43. Continued over the page


If so, they are excluded from the operation of the depreciation rules in Division 40. Cabins Whether removable dwellings and cabins are classified as capital works would depend on how permanently they are fixed to the land. Portable items are not generally considered to be capital works. As a general guide, if a dwelling or cabin is portable and can easily be moved it is more likely to be dealt with under Division 40. On the other hand, if a dwelling or cabin is fixed to the land with a reasonable degree of permanence it should be dealt with under Division 43 (not eligible for the Investment Allowance). Site infrastructure This expenditure (underground electricity, water etc) is likely to be classified as capital works and should not qualify for the Investment Allowance. Spa The ability to claim the Investment Allowance in relation to the spa will depend on whether the spa is fixed or freestanding. If the spa is fixed to the ground it should be classified as capital works. On the other hand, if the spa is freestanding and can moved reasonably easily it should fall within the scope of the capital allowances rules and be eligible for the Investment Allowance (subject to meeting the other criteria). In ground swimming pool This should be classified as capital works and should not qualify for the Investment Allowance.

The ability to claim a deduction under Division 40 ITAA 1997 also requires that the entity in question is the ‘holder’ of the asset for Division 40 purposes. An entity will hold the asset for Division 40 purposes if it falls under one or more of the situations set-out in the table in section 40-40 ITAA 1997. Generally speaking, the entity that holds an asset is the one that has the legal ownership of the asset however in some cases the ‘economic’ owner will be the holder of the asset. For lease arrangements, whether you ‘hold’ the asset will depend upon the nature of the lease i.e. if the arrangement is a hire purchase then the lessee will generally be the ‘holder’ of the asset for Division 40 purposes. If the arrangement is a finance lease and it is likely the lessee will acquire the asset, they may be the ‘holder’ of the asset. If the arrangement is a standard operating lease then they are unlikely to ‘hold’ the asset.


Example 2.4 – Leasehold improvements

Invest Co currently operates their business from the ground floor of a premises rented from a third party. They undertake a $90,000 leasehold improvement project (contract entered into in June 2009) made up of constructing new offices on their floor and installing new desks and partitions. Invest Co will be able to claim the Investment Allowance on the expenditure that went towards the acquisition and/or second element of cost of depreciable assets within this leasehold improvement expenditure (as they hold these assets for Division 40 ITAA 1997 purposes). Invest Co will need to separate out those depreciable assets (e.g. desks and partitions that are not completely affixed to the building). The expenditure on offices and other fittings etc that are affixed to the building will be depreciable under Division 43 ITAA 1997 and will therefore not be eligible for the Investment Allowance.

For a luxury car lease, the lessee is treated as the holder for Division 40 purposes for the time the lessee has the right to use the car. Please note the Investment Allowance will be capped against the luxury car limit i.e. $57,180 for current year instead of the actual ‘cost’. A car will be eligible for the Investment Allowance if car expenses are claimed under:

The one third of actual expenses method;

The log book method; or

The 12% of original cost method. A car will not be eligible for the Investment Allowance if car expenses are claimed under the cents per kilometre method. The following table summarises how the Investment Allowance can apply to cars: Car expenses claimed under

following method…

Eligible for Investment Allowance? Reason

One third of actual expenses Yes, provided over 50% business

use

Deduction claimable under Div 40

(although Division 28 sets out how

to calculate the deduction)

Log book Yes, provided over 50% business

use

Deduction claimable under Div 40

(although Division 28 sets out how

to calculate the deduction)

12% of original value Yes, provided over 50% business

use

Specifically included by section 41-

5(2)(a) of the Bill

Cents per kilometre No Deduction not claimable under

Division 40, not specifically

included by the Bill


Example 2.3 – Cars and the Investment Allowance

From Example 1.4, page 13 of the Explanatory Memoranda to the Bill On 20 March 2009, Bernard acquires a station wagon to use in his computer repair business. As Bernard does not keep a logbook or adequate car expense records, he is precluded from using either the log book method or one-third of actual expenses methods. However, he can still use the 12 per cent of original cost method to work out his car expense deductions for the 2008/09 income year. Bernard cannot claim a deduction under section 40-25 ITAA 1997 for the car’s decline in value for the 2008/09 income year. However, he will still be able to claim the Investment Allowance if he can satisfy all of the other criteria.

Sheds used in agricultural and/or pastoral operations and the Investment Allowance

The interaction of Divisions 40, 43 and 45 of the ITAA 1997 enables expenditure on some ‘structural improvements’ (such as sheds) that are used in agricultural and/or pastoral businesses to be eligible for the Investment Allowance (provided the other requirements for the Investment Allowance are met). This is because a deduction for such a structural improvement (shed) that is used in an agricultural and/or pastoral business should be claimed under Division 40 ITAA 1997. To be eligible for the Investment Allowance, the new investment (i.e. either the cost /construction of a new asset or the second element of cost of an existing asset) must be a ‘tangible’ asset that is depreciable under Division 40 ITAA 1997. However, if the deduction in relation to this new investment is claimable under Subdivision 40-F, Subdivision 40-G, Subdivision 40-J or Division 43 ITAA 1997 it will not be eligible for the Investment Allowance. New investment in relation to a farming shed will generally not be depreciable under Subdivision 40-G (Land-care operations) due to section 40-630(2) ITAA 1997. Further, it will not generally be claimable under Subdivision 40-F (Water facilities and horticultural plants) or Subdivision 40-J (Trees used in carbon sequestration). In terms of Division 43 ITAA 1997, an amount of ‘construction expenditure’ is claimable under Division 43 ITAA 1997 provided the expenditure satisfies the requirements of section 43-70 ITAA 1997. Section 43-70 ITAA 1997 excludes from the definition of ‘construction expenditure’ expenditure on ‘plant’ (see section 43-70(2)(e) ITAA 1997). See ATO ID 2004/481 for confirmation that a farming shed will be considered ‘plant’ for the purposes of section 45-40(1)(c) ITAA 1997 and is therefore not eligible for a deduction under Division 43 ITAA 1997 (as it is not ‘construction expenditure’ as required by section 43-70 ITAA 1997). Although ATO ID 2004/481 has been withdrawn, the principles contained in it are still relevant (see withdrawal notice at the top of the ID). The farming shed is therefore depreciable under Division 40 ITAA 1997. The Commissioner’s effective life for a farming shed in TR 2008/4 is roughly 50 years (this is based on the Commissioner listing the effective life of a ‘shearing shed’ as 50 years). Therefore, from a year to year deduction point of view, claiming a deduction under Division 40 or Division 43 for such a farming shed has not made much of a difference in

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the past (as the amount deducted under Div 40 is comparable to the deduction (2.5%) that would be available under Div 43). However, from the point of view of being eligible for the Investment Allowance it makes a huge difference i.e. the fact that farming sheds are depreciable under Division 40 ITAA 1997 instead of Division 43 ITAA 1997 means that expenditure that goes to the first or second element of the cost of a farming shed can be eligible for the 50%, 30% or 10% Investment Allowance.

Eligibility Criteria 3 – Asset must be ‘new’

To claim the Investment Allowance in relation to the purchase of an asset, the asset must be ‘new’. An asset is ‘new’ if it has never been installed ready for use by anyone, anywhere. This means that second-hand assets are NOT eligible for the investment allowance (subject to the exception below). An asset will be second hand and ineligible if it has been used in a business, to derive income or even if the asset was previously used for private purposes. An exception to the requirement that the asset is ‘new’ is for assets that are used for reasonable testing and trialling.

Example 3.1 – Demonstrator car

From page 14 of the Explanatory Memorandum to the Bill Belinda is contemplating the purchase of a demonstrator vehicle from a dealer for $25,000 to use in her business. Although the dealer had acquired the car new from the factory, he would regularly use the car to drive to and from work. The prior use by the car dealer does not constitute reasonable testing and trialling and Belinda would not be eligible to claim the Investment Allowance for the car.

Example 3.2 – Asset purchased after initial testing

from page 14 and 17 of the Explanatory Memorandum to the Bill Collie Mining Company arranges to lease a new dragline (a piece of machinery used in open cut mining) from Big Machine Leasing. Under their ‘sale and lease back’ contract, Collie Mining Company is responsible for acquiring and assembling the necessary components. After testing the dragline in operational use, the ownership is transferred to Big Machine Leasing. The prior use of the dragline only amounts to reasonable testing and trialling (therefore Big Machine leasing can claim the Investment Allowance provided the other conditions are satisfied as they ‘hold’ the asset due to item 10 in the table in section 40-40 ITAA 1997). However, Big Machine Leasing may indirectly pass on the benefit of the Investment Allowance to Collie Mining Company e.g. in the form of lower leasing payments.


Eligibility criteria 4 –Asset cannot be eligible for a deduction under Subdivision 40-F, Subdivision 40-G or Subdivision 40-J ITAA 1997

If the asset is eligible for a deduction under Subdivision 40-F, 40-G or 40-J ITAA 1997 it will not be eligible for the Investment Allowance. This exclusion is based on eligibility of the asset for one or more of the concessions under these Subdivisions i.e. the taxpayer cannot elect not to claim a Subdivision 40-F deduction and claim the Investment Allowance if the asset in question is eligible for the Subdivision 40-F deduction. This will exclude the following assets:

Water facilities

Horticultural plants

Fences, levees, drainage works that qualify as ‘land care operations’

Electricity and telephone lines (including metering points etc) that qualify for a deduction under Subdivision 40-G ITAA 1997

Trees used in carbon sequestration activities that are eligible for a deduction under Subdivision 40-J ITAA 1997.

Example 4.1 – Asset depreciable under Division 40-F

Example from page 11 of the Explanatory Memorandum to the Bill Angus operates a primary production business. In April 2009 he enters into a contract for a new combine harvester – to be delivered in September 2009. The combine harvester is a tangible, depreciating asset for which a deduction is available under Subdivision 40-B ITAA 1997. The Investment Allowance will apply to this asset (subject to the other criteria being met). At the same time, Angus replaces a pump for the dam on his property which he uses principally for the purpose of conserving water. Capital allowance deductions for the pump are available under Subdivision 40-F. Section 40-50 requires Angus to claim capital allowance deductions in relation to the pump under Subdivision 40-F ITAA 1997 rather than under Subdivision 40-B ITAA 1997. The pump will not qualify for the Investment Allowance. Angus still benefits from being able to write-off the pump over three years (as permitted under Subdivision 40-F) which is less than its effective life. NOTE – if the asset is eligible for depreciation under Subdivision 40-F, 40-G or 40-J it will not be eligible for the Investment Allowance i.e. you cannot elect not to apply one of these three Subdivisions to enable the Investment Allowance to apply.


Eligibility Criteria 5 – The cost requirement

A small business entity can claim the Investment Allowance for eligible assets if the asset (or additional investment) ‘cost’ at least $1,000 GST exclusive (provided all the other conditions are met). For businesses that are not small business entities, the minimum expenditure on the new asset or improvement is $10,000 GST exclusive. The Investment Allowance rules do allow certain expenditure to be ‘amalgamated’ for the purposes of determining whether the cost of the new asset or additional investment is at least $1,000 or $10,000 GST exclusive. For new asset purchases, identical or substantially identical assets can be added together for the purposes of satisfying the thresholds. Further, new assets that form part of a set can be added together for the purposes of satisfying the thresholds.

Example 5.1 – Identical/substantially identical

The taxpayer (not a small business entity) purchases 6 of the same laptop computer before 30 June 2009. Four of the 6 laptops cost $1,500 GST exclusive and the other two cost $2,100 GST exclusive (these other two have more memory). As the 6 assets are substantially identical (despite the difference in memory), the costs for each asset can be added together for the purposes of the investment allowance threshold. As the aggregated cost of these laptops is $10,200, the Investment Allowance can be claimed for each laptop.

Example 5.2 – Marketed/intended to be used as a set and identical/substantially identical

The taxpayer (not a small business entity) purchases 5 of the same dining table sets for use in the staff cafeteria. Each dining table set has 6 chairs and a table and cost $2,000 GST exclusive. As the sets are identical then the cost of all 5 sets can be added together for the purposes of the investment allowance. As the cost is $10,000 GST exclusive, the taxpayer can claim the Investment Allowance in respect of each dining table set. NOTE – if the 5 identical sets were purchased at different times from different retailers throughout the income year, their costs could still be grouped together for the purposes of meeting the Investment Allowance cost threshold.


Example 5.3 – Sold/marketed as part of a set

Edward (a small business entity) purchased a crockery set for use in the staff kitchen for $1,100 GST exclusive. The set contains items that can be purchased individually although the purchase by Edward was for the set of items packaged together. This will be eligible for the Investment Allowance (provided the other conditions are met).

Example 5.4 – Different assets used in similar setting

Example from page 20 of the Explanatory Memorandum of the Bill Edward operates a landscaping business and is not a small business entity. To better manage his business accounts he acquires a computer and a new multifunction photocopier. Both assets individually have a cost of less than $10,000 and so the relevant new investment threshold is not satisfied in relation to either asset. Edward cannot group his expenditure on the computer and the photocopier for the purposes of meeting the new investment threshold, even though they will be used in a similar setting.

Example 5.5 – Different assets, similar use

Example from page 21 of the Explanatory Memorandum to the Bill Edward buys a range of power tools for his business – a lawn mower, brush cutter and leaf blower. While these assets add to Edward’s stock of machinery, they are not a set. It would make no difference if Edward purchased them at the same time and from the same supplier or manufacturer.

We note that currently there is an immediate write-off available for assets costing $1,000 or less for small business entities. However, for the purposes of the $1,000 write-off under the small business entity pooling rules, you do not need to combine the costs of each asset to determine eligibility. This anomaly gives rise the situation set out in Example 5.6 below.


Only amounts that are added to the cost base of the asset under the first or second element of cost are eligible for the Investment Allowance (i.e. repairs and other immediately deductible expenses incurred in relation to the asset are not eligible).

Example 5.8 – Repairs to assets not eligible

Example from page 22 of the Explanatory Memorandum to the Bill Edward uses a motor vehicle for his business. As a result of Edward’s use of the vehicle, he needs to replace the tyres. The cost of replacing the tyres is not included in the second element of the vehicle’s cost because it would ordinarily be immediately deductible as a repair (not eligible for the Investment Allowance). Edward subsequently attaches a tow bar to the vehicle. The tow bar enhances the vehicle’s capacity to transport equipment and parts that are used in Edward’s landscaping business. The expenditure incurred by Edward to acquire and attach the tow bar to the vehicle forms part of the second element of cost of the vehicle under paragraph 40-190(2)(a) ITAA 1997. The expenditure is capital expenditure incurred in bringing the asset to its present condition.

Where the asset purchased is a luxury car (i.e. for the 2008/09 income year the ‘cost’ exceeds $57,180), the Investment Allowance will be worked out with reference to this luxury car cost limit (not the actual ‘cost’).

Example 5.6 – Identical/substantially identical and SBE pooling

Invest Co (an SBE) purchases 5 chairs for use in its business during June 2009. Each chair is identical and costs $500. For the purposes of the investment allowance, the cost of each chair can be amalgamated to determine whether Invest Co can access the Investment Allowance (they will be eligible as the cost is $2,500). For the purposes of the pooling rules in Division 328 ITAA 1997, Invest Co can claim an immediate 100% deduction for the cost of each chair in the year of purchase i.e. you do not need to aggregate the cost of identical/substantially identical assets to determine eligibility for the 100% deduction. Therefore, in the year ending 30 June 2009, Invest Co can claim a 150% deduction ($3,750) for the outlay of $2,500. Please note that this outcome is possible under the current provisions of the Bill and the current Division 328 ITAA 1997.


Example 5.9 – Luxury cars

Edward purchased a motor vehicle for his business in May 2009 for $70,000 (GST exclusive). Edward is not a small business entity. As the vehicle is used in Edward’s business prior to 30 June 2009, he will be entitled to claim the 30% Investment Allowance in relation to the vehicle. However, the deduction under the Investment Allowance will be limited to 30% of the luxury car limit or $17,154 (not $21,000).

If an amount has been incurred in one year but was not eligible for the Investment Allowance (e.g. total incurred under $10,000 for an entity that is not a small business entity), the amount un-claimed can be carried over to the next year.

Example 5.10 – Amounts incurred over two income years

Example from page 29 of the Explanatory Memorandum to the Bill Hugo owns a golf course. He does not meet the definition of a small business entity so his new investment threshold is $10,000. He orders and takes delivery of a new $9,000 golf cart in June 2009. His recognised new investment amount for 2008/09 is only $9,000 so he cannot claim the Investment Allowance for that year. In July 2009 he upgrades the cart at a cost of $1,200. His recognised new investment amount for 2009/10 is $10,200 as he had not previously claimed the Investment Allowance on the $9,000 amount. Hugo receives the Investment Allowance at a rate of 10% for 2009/10.

Eligibility Criteria 6 – The investment commitment requirement

For taxpayers that are not small business entities, the ability to claim either the 30% Investment Allowance or the 10% Investment Allowance in relation to an asset will depend upon when the contract to buy (or construct or improve) the asset is entered into. If the contract to buy the asset is entered into between 12.01am 13 December 2008 and 11.59pm 30 June 2009, the taxpayer may be able to claim the 30% Investment Allowance in relation to the asset (provided the other relevant criteria are met). If the contract to buy the asset was entered into between 12.01am 1 July 2009 and 11.59pm 31 December 2009, the taxpayer may be able to claim the 10% Investment Allowance in relation to the asset (provided the other relevant criteria are met). Small business entities will be entitled to the 50% Investment Allowance as long as they enter a contract to buy the asset between 12.01am 13 December 2008 and 11.59pm 31 December 2009. In terms of when such a contract will be entered into, this will depend on whether the amount will be included in the first or second element of the asset’s cost. For amounts that will be included in the first element of the asset’s cost, the taxpayer will have committed to acquire the asset at the time the taxpayer has:


Entered into a contract under which they hold the asset or will start to hold the asset at some point in time;

Started to construct the asset;

Started to hold the asset in some other way. This means that the taxpayer does not need to have paid for the asset fully or taken delivery of the asset by the relevant dates (30 June 2009 and 31 December 2009). They simply must have entered into a contract, started construction and/or started to hold the asset (in some other way) by these dates.

Example 6.2 – Purchase of asset with deposit

Farm Co (not a small business entity) is intending to purchase a new harvester costing about $350,000 before the end of the income year. The normal procedure with the local sales agent is to pay a small deposit (in this case $5,000) when the contract is signed and then when the harvester is available for delivery a chattel mortgage agreement is then signed taking into consideration any trade in on the value of the old harvester. The main issue in this situation is whether Farm Co enters into a contract to buy the new harvester before 1 July 2009. If the terms of the pre 1 July 2009 agreement provide that they have a legal obligation to buy the harvester then they will be able to claim the Investment Allowance even if the chattel mortgage documents are executed after 1 July 2009.

If a contract to purchase an asset was entered into prior to 13 December 2008, this requirement cannot be circumvented by ‘refreshing’ the contract i.e. cancelling the original contract and establishing a new one (see paragraph 1.107 on page 26 to the Explanatory Memorandum to the Bill). In terms of contracts entered into prior to 13 December 2008 with an option to acquire the asset at a later time, the investment commitment is taken to have occurred when the option is exercised (not the date of the original contract). Therefore, provided the option is taken up prior to 31 December 2009 the Investment Allowance may apply: see paragraph 1.109 on page 26 of the Explanatory Memorandum to the Bill. The Investment Allowance can also apply where the taxpayer constructs their own assets for use in their Australian business. In terms of when the taxpayer will be held to have started to construct the asset, this will be the time when they have demonstrated a clear intention or commitment to proceed with the

Example 6.1 – Entering into a contract

John (a sole trader) verbally agrees to buy a car for use mainly in his plumbing business on 30 June 2009. He does not pay any deposit until the 7

th of July 2009 and does not take delivery of the car until 1 August 2009.

Although technically John has entered into a contract for the acquisition of the car, we would strongly advise John to GET SOMETHING IN WRITING prior to the relevant date (30 June 2009 or 31 December 2009) that sets out the asset in question, terms, price etc. Taxpayers will need to have something to evidence the pre 30 June 2009 or per 31 December 2009 contract.


construction. Where the decision making process that goes into the construction of the asset and the actual physical construction of the asset straddle the relevant dates for the Investment Allowance (i.e. 13 December 2008, 30 June 2009 and 31 December 2009), determining when the construction actually ‘commenced’ could determine eligibility and the amount claimable (50%, 30% or 10%).

The following tables set out the different Investment Allowance rates that can be claimed in different circumstances. They are relevant to this section as they set out the interaction of the “Installed ready for use” date with the “Commitment to buy the asset” date for the purposes of determining eligibility for the Investment Allowance (as well as the applicable rate).




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

Example 6.3 – Constructing own asset

Example from page 25 of the Explanatory Memorandum to the Bill Greenfield Power is a power supply company that builds its own transmission lines. During mid-2008, the company started to contemplate building a number of new transmission lines. Over the remainder of 2008, preliminary design work was undertaken in anticipation of the project going ahead. On January 15 2009, the company’s directors sign off a decision to proceed with construction of the lines. However, the company does not physically start to construct the transmission lines or order materials at this stage. On 10 February the relevant division of the company started to finalise the specification of the lines and placed the first of a series of orders for the necessary materials. The investment commitment time for each of the transmission lines is 15 January 2009 as this is when the company evidenced a clear intention to proceed with the construction.





30 June 2009

50% in 2008-09

30 June 2010

50% in 2009-10

31 December 2010

50% in 2010-11

Eligibility criteria 7 – The first use/installed ready for use requirement

The year in which the Investment Allowance deduction is claimed is determined by the year in which the asset it is first used or installed ready for use. In order to claim the Investment Allowance in the 2008/09 income year, the contract for the acquisition of the asset (or the addition) must be in place by 30 June 2009 and the asset’s first use time must be before 30 June 2009.

Example 7.1 – 30% deduction in 2008/09

Invest Co (not a small business entity) enters into a contract to purchase an asset on 15 June 2009 with a cost of $5,000. The asset is installed ready for use by 30 June 2009. Invest Co can claim the extra 30% deduction of $1,500 in 2008/09.

If the asset was not installed ready for use by 30 June 2009 but was installed ready for use by 30 June 2010 and the contract for the acquisition of the asset was entered into prior to 30 June 2009, the taxpayer can claim the Investment Allowance deduction in the 2009/10 tax return. Small business entities would claim the 50% Investment Allowance while non-small business entities would claim the 30% Investment Allowance.


Invest Co (not a small business entity) enters into a contract to purchase an asset on 15 June 2009 with a cost of $5,000. The asset is installed ready for use after 30 June 2009 but before 30 June 2010. Invest Co can claim the extra 30% deduction of $1,500 in 2009/10.

For non-small business entities, if the contract for the acquisition of the asset was entered into before 31 December 2009, the 10% Investment Allowance will be claimable in the 2009/10 income year if it was installed ready for use before 30 June 2010. For small business entities, the 50% Investment Allowance will be claimable in the 2009/10 income year if the contract for acquisition was entered into before 31 December 2009 and was installed ready for use before 30 June 2010.



Invest Co (not a small business entity) enters into a contract to purchase an asset on 15 December 2009 with a cost of $5,000. The asset is installed ready for use by 30 June 2010. Invest Co can claim the extra 10% deduction of $500 in 2009/10.

For non-small business entities, if the contract for the acquisition of the asset was entered into before 31 December 2009, the 10% Investment Allowance deduction will be claimable in the 2010/11 if it was installed ready for use between 1 July 2010 and 31 December 2010. For small business entities, the 50% Investment Allowance will be claimable in the 2010/11 income year if the contract for acquisition was entered into before 31 December 2009 and was installed ready for use between 1 July 2010 and 31 December 2010.


Invest Co (not a small business entity) enters into a contract to purchase an asset on 15 December 2009 with a cost of $5,000. The asset is installed ready for use after 30 June 2010 but before 31 December 2010. Invest Co can claim the extra 10% deduction of $500 in 2010/11.

For non-small business entities, if the contract for the acquisition of the asset was entered into before 30 June 2009, the 10% Investment Allowance will be claimable in the 2010/11 income year if it was installed ready for use between 1 July 2010 and 31 December 2010. For small business entities, the 50% Investment Allowance will be claimable in the 2010/11 income year if the contract for acquisition was entered into before 30 June 2009 and was installed ready for use between 1 July 2010 and 31 December 2010.


Invest Co (not a small business entity) enters into a contract to purchase an asset on 15 June 2009 with a cost of $5,000. The asset is installed ready for use between 30 June 2010 and 31 December 2010. Invest Co can claim the extra 10% deduction of $500 in 2010/11.

The following tables set out the different Investment Allowance rates that can be claimed in different circumstances. They are relevant to this section as they set out the interaction of the “Installed ready for use” date with the “Commitment to buy the asset” date for the purposes of determining eligibility for the Investment Allowance (as well as the applicable rate).





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




30 June 2009

50% in 2008-09

30 June 2010

50% in 2009-10

31 December 2010

50% in 2010-11


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INVESTMENT ALLOWANCE GUIDE - eknowhow · Advanced Tax & Business Services is an excellent program...

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