Businesses may have until 31st December 2009 to feast on tax deductions provided by the Federal Government for the purchase of new plant and machinery but RSM Bird Cameron Director Geoff Hall is advising taxpayers to check the menu first.
All hopes of claiming a full 50% investment allowance tax deduction hinges on the business turnover and the timing of purchasing the new plant and machinery.
The investment allowance tax break can be spectacular for those taxpayers with an annual turnover of less than $2,000,000 who are classified as “small business entities”.
Those taxpayers can reap a tax deduction of a massive 50% of the cost of new plant, provided the item of plant costs more than $1,000.
For businesses with turnover of more than $2,000,000, they may not qualify as “small business entities” reducing their investment allowance claims to 30% or 10%. Also, only items of new plant costing more than $10,000 qualify.
Some farmers do not have consistent turnovers from year to year. Finding the right year to purchase plant can be critical in determining whether the 50% deduction applies.
This is illustrated in the following three scenarios:
1. Turnover consistently under $2,000,000
Example: Tony is a farmer and has an annual business turnover of $1,500,000 and wants to acquire a new header costing $500,000. Tony qualifies as a small business entity every year.
- If Tony orders the header between 13th December 2008 and 30th June 2009 and has it installed (delivered) before 30th June 2009 he will obtain an investment allowance deduction of 50% or $250,000 for the year ended 30th June 2009.
- If he orders the header between 13th December 2008 and 30th June 2009 and has it installed before 30th June 2010, he will obtain the 50% or $250,000 deduction for the year ended 30th June 2010.
- If he orders the header before 31st December 2009 and has it installed before 30th June 2010, he will obtain the 50% deduction for the year ended 30th June 2010.
- If he orders the header before 31st December 2009 and has it installed between 1st July 2010 and 31st December 2010 he will obtain the 50% deduction for the year ended 30th June 2011.
- If he fails to order by 31st December 2009 or fails to have a pre 31st December 2009 ordered header installed before 31st December 2010 he will be ineligible for the 50% investment allowance.
If Tony was on a tax rate of 31.5%, the $250,000 investment allowance deduction would save him a significant $78,750 in income tax.
2. Turnover consistently over $2,000,000
Example: Simon is a farmer and has an annual business turnover of $2,500,000 and wants to acquire a new header costing $500,000. Simon never will qualify as a small business entity:
- If Simon orders the header between 13th December 2008 and 30th June 2009 and has it installed (delivered) before 30th June 2009 he will obtain an investment allowance deduction of 30% or $150,000 for the year ended 30th June 2009.
- If he orders the header between 13th December 2008 and 30th June 2009 and has it installed before 30th June 2010 he will obtain the 30% or $150,000 deduction for the year ended 30th June 2010.
- If he orders the header after 30th June 2009 and before 31st December 2009 and has it installed before 31st December 2010, he will obtain only a 10% or $50,000 deduction for the year ended 30th June 2010 or 2011.
- If he fails to order by 31st December 2009 or fails to have a pre 31st December 2009 ordered header installed before 31st December 2010, he will be ineligible for the 10% investment allowance.
3. Turnover fluctuating above and below $2,000,000
The timing of investment in new plant can be critical in determining the investment allowance rate.
Example: Adam is a farmer and has an annual business turnover of $1,800,000 in 2008, $2,200,000 in 2009 and estimated $2,200,000 in 2010 and is to acquire a new header costing $500,000.
To be eligible as a small business entity in a particular year of income, the turnover must be under $2,000,000 in either the current year or the year previous to the current year.
That is, Adam is a small business entity in 2008 and 2009 but not in 2010. Adam’s timing in committing to the purchase of the machine will affect the amount of investment allowance deduction Adam can claim.
- If the header is ordered any time between 13th December 2008 and 30th June 2009, Adam will be eligible for the full 50% investment allowance provided the header is installed before 31st December 2010.
- The critical point here is “if Adam is a small business entity at the time of ordering the header (ie. committing to the purchase), it does not matter that he may not be a small business entity in the year the header is delivered.”
- If the header was ordered after 30th June 2009 and before 31st December 2009, then Adam’s investment allowance claim would be 10% if installed before 31st December 2010.
Timing is very important as ordering the header before 30th June 2009 will save Adam $78,750 in tax (on a 31.5% marginal tax rate). Ordering the header after 30th June 2009 will reduce this saving to $15,750…a $63,000 reduction in tax benefit.
In the event that the header was ordered after 30th June 2009 and before 31st December 2009, Adam may revise how and when he markets his grain and livestock for the year ended 30th June 2010. Such a review may result in his turnover dropping below $2,000,000 during the year ended 30th June 2010.
Adam, as a result, continues to be a small business entity in 2010 enabling him to claim a $250,000 tax deduction instead of a $50,000 tax deduction.