02 9683 5999-BY SHANE WINDSOR CA
INVESTMENT ALLOWANCE UPDATE
There have been some interesting developments since we last wrote about the investment allowance. Below is a summary of the impact of these developments and a reminder of the rules regarding eligibility.
General Business Tax Break
The general business tax break applies to all businesses with an annual turnover of greater than $2 million. An investment allowance of 10% is currently still available for any eligible assets where the investment commitment time is prior to 31 December 2009. Eligible assets are those where the cost is greater than $10,000 and they are installed prior to 31 December 2010. The investment allowance will be claimed in the tax return that corresponds to the date installed.
Small Business Tax Break
The small business tax break applies to businesses with an annual turnover of less than $2 million. The investment allowance of 50% is also available for any eligible assets where the investment commitment time is prior to 31 December 2009. For small business, eligible assets are those where the cost is greater than $1,000 and they are installed prior to 31 December 2010. The investment allowance will be claimed in the tax return that corresponds to the date installed.
Investment Commitment Time
With the cut-off time of 31 December 2009 fast approaching, it is critical to ensure that any assets acquired are eligible for the investment allowance. It has been generally understood that you were committed to investing in an asset when you placed an order with your supplier, it was not necessary that the asset be delivered and paid for.
The Australian Taxation Office have issued an interpretive decision that states that for an asset acquired under a hire purchase agreement the investment commitment time is the date of signing the agreement and not the date of ordering the asset.
For example, an asset ordered from your supplier on 1 December 2009 but financed by way of hire purchase agreement on 15 January 2010 would not be eligible for the investment allowance. Alternatively, in the same scenario, financing the asset by way of chattel mortgage on the same date would still be eligible.
A chattel mortgage or bank loan that is secured by a charge over the asset will not alter the investment commitment time.
Purpose Of Use
The investment allowance is only available for entities that are actually conducting a business and the asset is acquired principally for business use. Accordingly, it will not be available for those that own rental properties or those that, for asset protection purposes, hold assets that are used by another entity that actually runs the business.
Warning
We recommend that you exercise caution and seek our advice for any assets that you intend to acquire in the near future and in particular regarding the method of finance used. Obtaining the right advice will result in preserving your eligibility for either a 50% or 10% bonus tax deduction.
SMALL BUSINESS BENCHMARKS
The Australian Taxation Office has recently released small business benchmarks.
What Are Small Business Benchmarks?
Benchmarks provide a snapshot of what, on average, is happening in a particular industry by providing a measure of various business costs in relation to turnover.
There are two types of benchmarks for small business:
- Performance benchmarks: these are based upon information reported in income tax returns and business activity statements.
- Input benchmarks: are based upon information provided by industry participants and trade associations.
Performance Benchmarks
Performance benchmarks will allow you to compare your business performance with others in your industry.
These benchmarks contain up to five ratios to help you compare and analyse the performance of your business against others in the same industry. The ratios are:
- Costs of goods sold to turnover.
- Labour to turnover.
- Rent to turnover.
- GST-free sales to turnover.
- Motor vehicle expenses to turnover.
Input Benchmarks
Input benchmarks show an expected range of income for tradespeople based upon the labour and materials used. This type of benchmark currently has limited use as it only applies to tradespeople who work with household customers rather than those with business to business transactions.
Use Of Benchmarks
The ATO will use the benchmarks to identify those businesses that are reporting income and expenses outside their industry average. In some instances, there are genuine reasons why income and expenses are not within the average range.
However, the benchmarks may be used to identify potential audit targets. Due to increased competitive pressure on small business, some businesses may seek an advantage by not recording and paying tax on all transactions.
Availability Of Benchmarks
- Manufacturing; including bakeries and cake shops.
- Construction; including most building trades.
- Retail trade; including clothing, liquor, tyres and newsagents
- Accommodation and food services; including coffee shops, pubs and restaurants.
- Transport, postal and warehousing; including taxi drivers and road freight transport.
- Rental, hiring and real estate services.
- Administrative and support services; including cleaning and pest control
- Other services; such as dry-cleaning services
It is our understanding that the benchmarks will be regularly updated and expanded to cover additional industries.
EXAMPLE OF BENCHMARKS
Tyre Retailing
The above information was developed from income tax returns and business activity statements lodged for the 2007-08 year. The ATO information also includes a summary of the normal trading practices in the industry. In the case of tyre retailing, the ATO information states that “The majority of businesses are independent operators but there is an increasing presence of franchise operations. Consumers of tyres are quite mobile so they are able to shop around for the best deals on tyres for their vehicles. As a result, the cost of goods sold in the industry is fairly consistent.”
