The federal budget has revealed an increase in the tax break for small and other sized businesses when they purchase equipment for more than $1,000.
This presents a fantastic opportunity particularly for small business in terms of vehicle acquisition as they should be able to claim an exceptional tax rebate.
Simply put, subject to meeting certain criteria, businesses will be able to claim an extra 50% tax break on new car purchases in the first year of ownership. This is on top of any standard depreciation claimed and, in year two, the asset will, for future accounting purposes, be valued as if it had just been depreciated as normal.
John buys a car for business use and pays $50K in cash.
In the financial year 2009/2010 he claims a depreciation of 25% (his standard rate, say) plus 50% – resulting in a complete tax write-off for the year of 75% or $37,500.
The following year the car will then be depreciated at the standard rate of 25% as normal but starting from a value of $37,500.
So John has effectively benefited by claiming an extra tax deduction of $25,000 on his new car!
Key Points to Remember
The tax break will only apply for brand new cars (and demonstrators (Note: the legislation is clear that the car must have been used for sales demonstration purposes only not as the ‘wife of the Dealer Principal’s’ car!)’)
Cars must be purchased before December 31st 2009 for the 50% allowance and delivered before December 31st 2010.
Even if the primary use of the vehicle changes over time, as long as the car was purchased for the principal purpose of carrying on a business, the tax break may still be claimed. So even for a car that is used 100% for private use by an employee, if the car is purchased by the company it is an employment cost (assuming FBT is paid etc) and it is part of the employer carrying on their business and will be eligible to the Investment Allowance
The tax break is only available up to the car limit (currently $57,180). If you purchase a car for more than this amount you will still qualify for the rebate but only up to that figure (ie you will achieve an extra tax deduction of 50% of $57,180 or $28,590
Vehicles held under a lease may still qualify for the tax break. This depends on the structure of the lease and whether the arrangement is considered akin to a rental agreement (eg operating lease) or an asset purchase under finance terms (traditional finance lease) by the tax office. Best to seek advice from your accountant regarding the status of a tax rebate in this situation.
Businesses with an annual turnover of more than $2m will only be able to claim a 30% allowance and that car purchase must be made prior to 30 June 2009. They will be able to claim a lesser allowance of 10% for purchases made between 30th June 2009 and 31st December 2009. (in both cases, the vehicles must be delivered within 12 months of order date)
There are minimum purchase thresholds for the allowance to be claimed. However for brand new vehicles this requirement will always be met.
For further information visit minister.innovation.gov.au/Emerson/Pages/SMALLBUSINESSTAXBREAKBOOST.aspx and download this eligibility flow chart
Note: Please seek instruction from your accountant before acting on any of this advice. At the time of writing the small business and general business tax break legislation has not been passed so the information above makes the assumption that it will go through (which is our advice). No responsibility will be taken for any loss as a result of reliance upon this information.