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:
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 was on a tax rate of 31.5%, the $250,000 investment allowance deduction would save him a significant $78,750 in income tax.
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:
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.
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.