Investment allowance for equipment purchases

As a stimulus to encourage businesses to invest in equipment, the Government has re-introduced an investment allowance for new eligible plant and equipment expenditure. The measure involves a 10% investment allowance for items over $10,000 purchased between 13 December 2008 and 30 June 2009.

To be eligible, the equipment must be ordered before 30 June 2009 and installed by 30 June 2010. The expenditure must be on new assets or new expenditure on existing assets.

Only tangible assets subject to Division 40 of the Income Assessment Tax Act 1997 are eligible. Specific exclusions are buildings, trading stock, land, capital works, goodwill and rights. Eligible assets include: bulldozers, harvesting equipment, manufacturing equipment and motor vehicles.

The assets must be used in a business, although where an asset is partly used for business, it will be eligible if the business portion exceeds $10,000.

Limited information

At this stage, the only information available on this measure is contained in a Federal Government press release dated 12 December 2008 but legislation is expected to follow. The last time an investment allowance operated was in 1995 and we expect that the new allowance will operate under similar rules. If this is the case, assets acquired under operating lease arrangements may be excluded from eligibility, although assets acquired under normal hire purchase finance should be eligible.

Each item of expenditure or “unit of property” must cost over $10,000 to be eligible. We expect that a rule for what constitutes a “unit of property” will apply in determining eligibility. To be a “unit of property” the item must be an “entire entity in itself”, not made up of separate complimentary items that, when added together, exceed the $10,000 threshold. For example, a board table costing $7,000 with matching chairs for $4,000 will not be eligible as they have separate but complimentary functions. However, a refrigeration plant costing $9,000 that requires installation of $2,000 to be functional is likely to be eligible.

Motor vehicles, which were specifically excluded in the 1995 rules, have been made eligible under the current announcement.

Depreciated normally

Eligible plant and equipment will be depreciated normally, but in the 2009 tax year an additional 10% deduction will be allowed. (For items ordered before 30 June 2009 and not installed until the 2009/2010 financial year, the deduction will be in the 2010 tax return). The item will therefore receive a 110% depreciation deduction over its effective life.

For example, if an eligible item is bought on 1st April 2009 for $20,000 with a 3 year life, the deductible amounts will be:
Depreciation (over 3 years) $20,000
10% Investment allowance $2,000
Additional tax saving in year 1 (using 30% company tax rate) $600

The 10% investment allowance will not be credited to the book value of the asset for tax purposes and will not affect the taxable profit on sale of the asset.

When a new asset is acquired, you will not need to do anything additional to be eligible for the allowance. You will only need to inform Saward Dawson of the purchase. We will calculate the appropriate amount and include it in your 2009 or 2010 business tax return.

Published : 13 January 2009