Last Updated Jan 5, 2010 9:07 PM EST
I talk to Ken Raiss, a director at accountancy firm Chan & Naylor. He explains what the bonus means, who qualifies and how it is applied.
Make the most of it now, though. It's been extended once and it's unlikely to be repeated in a hurry!
Read treasurer Wayne Swan's announcement from back in May 2009.
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Well, there has been a whole swag of measures in the stimulus package. The easy one to understand was cash in the hand, just for having children. In my case, I would have had more if I'd known that was coming. There are also, of course, benefits for Aussie small businesses, but many of those run out at the end of this year, so you've got to move quickly; actually, not just small businesses, large businesses as well. To help make sure you don't miss out on the opportunity, I'm joined by Ken Raiss. He's a director at the accountancy firm Chan & Naylor. So, Ken, the main benefit is the tax break on new assets where worth is more than $1000 for small business, isn't it?
Ken Raiss: That's right. And it's open to any small business, and the definition of a small business is one that has $2 million or less of annual revenues.
Dobbie: OK, now there are similar benefits for larger companies ---
Dobbie: --- it's just that the value of the assets has got to be a proportion higher.
Raiss: Higher and the rate of the bonus is slightly less.
Dobbie: Now, the definition of a business is, let's say sole traders classifies as well, anybody who's got a business number basically.
Raiss: That's right. Anyone in a business, whether it be a sole trader, a partnership, a company or trust. Essentially the only one that's excluded are people who run what the tax man calls personal services income. And by that, I mean someone who's principally earning a reward percent of their income from the one revenue source.
Raiss: Sometimes a consultant effectively only works for one person and that's considered personal services income and that person will be excluded. So as long as you've got multiple clients, et cetera, et cetera, you're generally in the category of being able to claim this bonus.
Dobbie: And it applies to any depreciating asset. Give me your definition of a deprecating asset. What sort of thing can we include under that category?
Raiss: The definition goes a little bit further than a depreciating asset. It's certainly got to be an asset used in a business and principally a business that's located in Australia. The other part of the definition, obviously, is a depreciating asset. And, a depreciating asset is one effectively that reduces in value over time due to its usage, so like a wear and tear for whatever better term.
Raiss: So any asset that falls within that category would be generally caught.
Dobbie: So it's a piece of capital equipment, in other words, something that you need to go about your business, by and large.
Raiss: Correct, and the definition can include the settee or the couch that you buy to put in your waiting room at reception to a piece of equipment that stamps out widgets in the factory.
Dobbie: How does the tax break work then? What am I getting and how does that translate into money or savings back into the business?
Raiss: If we use $1000 that's got to be the minimum size of the purchase. And there's little definition here, so imagine you're a cafe owner and the chairs that you buy are $100. You'd have to at least buy ten, so ten like items of chairs of $100 each is $1000. Or, you've bought a computer for $1000. If we say based on $1000, you would get a 50 percent tax deduction on that $1000. 50 percent of $1000 is $500 and as part of your expenses you would be allowed to claim that $500 as an expense, so that would reduce your taxable income. The dollars you would save is effectively the tax rate you're paying on $500. If you're running your business in a company structure where the tax rate is 30 percent, then the savings, the cash benefit to you, is 30 percent of $500, which is $150 per se.
Dobbie: All right, but I'm buying those chairs already or I'm buying that computer already for my business anyway, so aren't I deducting that as an expense already?
Raiss: Correct. So you're actually getting a double whammy.
Raiss: You get the 50 percent as an expense and then you're allowed to depreciate the $1000 as you would normally have done.
Dobbie: In effect it's the same in that case, having spent $1500 on those chairs for tax purposes?
Raiss: Correct. Except you'd have to depreciate the $1000 on the chairs, whereas the 50 percent is an outright expense in the year of purchase. So you get the full benefit of the 50 percent in the first year.
Dobbie: I imagine a lot of people are using this as an opportunity to buy a company car, which is a question in itself. Is it wise to do that? If you're using a car partially for business but also for personal purposes, is it wise to put it under the business and does this make it more of an incentive to do that?
Raiss: You've first got to ask the question: what's the benefit of the car to the business? If we make the assumption that you need the car for business, then the amount that you would claim in the business is the proportionate amount for business use. So you would do a log book for argument's sake and that log book might say 85 percent of the car is for business. Then you would apply the depreciation and the bonus to 85 percent. If, for argument's sake, you bought a utility, a cab train, et cetera over the one tonne mark then the tax man basically allows you to say that's all used for business. They assume you don't go to the movies or the theatre in that sort of car, so they give you the benefit of the doubt and say you can claim 100 percent.
Dobbie: A lot of us do go to the cinemas in those cars, of course. So, what if I'm using the car 50 percent for work?
Raiss: The bonus then would be applied to 50 percent of the value of the car, so if you bought a $30,000 car and the value that the 50 percent is applied to is the amount excluding GST. So, if you paid $30,000 for the car plus $3000 GST, you claim the $3000 GST as you would normally in your BAS statement and the 50 percent is applied against the $30,000.
Dobbie: OK, enough of these $30,000 cars. What about if I want to buy a top of the line Merc? That's more my style, if I could afford it.
Raiss: Yes, and mine as well.
Dobbie: So, I can do it for that, too?
Raiss: Yes, but there's a cap on it. The cap on the car is a luxury car and from memory that is $57,190. That would be the maximum value you could apply the 50 percent tax bonus to.
Dobbie: So I don't need to use the car all of the time for business or even for the majority of time for business. What happens if I've got a car which I only use, say for 20 percent of the time for business and the rest of it is for personal use?
Raiss: The definition is certainly the asset must be principally for business, so it would really be the attitude of the tax department is 20 percent principally for business and common sense would suggest that that's probably not the case.
Raiss: So, you'd want to be able to argue certainly a percentage higher than 50 percent.
Dobbie: OK, but it's pretty much the 50 percent cut-off mark, though; 51 percent will do it, will it?
Raiss: Yes, if you ever got an audit, you might have to fight for it. Obviously, if you got 75 percent, it'll be a much easier argument to have.
Dobbie: What if I bought the car and I was using it for the vast majority of the time this year for business purposes and then a couple of years down the track it's going to be used largely for personal purposes, or maybe the business circumstances have changed, what happens then? Do I end up having to retrospectively owe the tax office for the bonus I've received?
Raiss: No, you do the calculation in the year that you claim it. If you substantially change the usage, then you would have to change the amount that you claim in the subsequent years. If in year one you were using it 40 percent of the time; yes, you still claim the bonus and then you claim 40 percent of the expenses. In year two, if you go down to 20 percent usage, then your claim would only be on 20 percent of your costs. You wouldn't have to go back and revisit the bonus.
Dobbie: Right. So not just for cars but obviously for any capital? In fact, perhaps less so for cars. It's an extraordinarily good deal, isn't it? I would have thought most businesses would be leaping onto this right now, aren't they?
Raiss: Yes, and that's certainly what we've seen, and that was the government's intention. And that's one of the reasons they extended the deadline from having your assets installed, ready for use, from end of June 2009 to the end of December 2009. And that was really to try and get activity back in the economy given the global financial crisis that we had.
Raiss: So, in the Labor budget just recently, they extended the deadline when that would've stopped.
Dobbie: OK. The message is get moving, if you haven't already in that case, isn't it?
Raiss: Yes, you said it much more succinctly than I did.
Dobbie: Ken Raiss, thanks so much for your time today.
Raiss: It's been a pleasure.
Dobbie: Well, I'll tell you what, I reckon that we actually deserve a tax break, if only because we've all been working so bloody hard!