Guide to small business and general business tax break

What is an eligible asset?

To be eligible for the tax break, the asset must be a tangible 'depreciating asset' for which a capital allowance deduction is available under section 40-25 of the ITAA 1997.

There are several exceptions to this rule - that is, assets which are made eligible for the tax break that would otherwise be excluded (meeting all other eligibility requirements):

• Assets for which a small business entity claims capital allowance deductions under Subdivision 328-D of the ITAA 1997 may be eligible assets.
• Tangible depreciating assets that receive deductions under the research and development provisions may also be eligible for the tax break.
• Cars for which you use the '12% of original value' method to work out your car expense deductions may be eligible assets.

A depreciating asset is an asset with a limited effective life that can reasonably be expected to decline in value over time.

Land, trading stock and intangible assets are excluded from the definition of a depreciating asset. These assets are not eligible for the tax break.

Software

All intangible assets are ineligible for the tax break including software.

Example

Annie operates a bakery. On 10 March 2009, she acquires a coffee machine, a new computer and some software. The coffee machine and computer are both tangible, depreciating assets. Annie may be able to claim the tax break in relation to these assets, if all of the other criteria are satisfied. However, the software is an intangible asset and is therefore not eligible for the tax break.

When a computer is purchased with pre-loaded application software included in the price, the computer and the software are separate depreciating assets - even though they are purchased together. Therefore, when working out the decline in value of each of the depreciating assets, you need to apportion the purchase price between the cost of the computer and the cost of the software and work out the decline in value of each asset separately. The apportionment of the cost should be done based on the cost of the items if purchased separately.

Similarly, when working out your investment amount for tax break purposes, the purchase price is apportioned between the cost of the computer and the cost of the software and the value of the software is excluded. However, the cost of operating software that forms part of the computer for the purposes of Division 40 of the ITAA 1997 does not need to be excluded.

Example

Eddie purchases a computer for $3,000 with three software packages included in the price. If the computer and the software were purchased separately, the software would cost $2,000 and the computer would cost $2,000. As the software represents 50% of the value of the package, $1,500 (that is, 50% of $3,000) would be reasonably attributable to the software. This amount would be excluded for the purposes of the tax break.

Assets that receive capital allowance deductions under other sections

Assets that receive capital allowance deductions under other sections of Division 40 of the ITAA 1997 are not eligible for the tax break.

Other sections provide concessional capital allowance deductions for certain depreciating assets through being able to claim deductions over a shorter period of time than the asset's effective life.

Example

Angus operates a primary production business. In April 2009 he enters into a contract for a new combine harvester - to be delivered in September 2009.

The combine harvester is a tangible, depreciating asset for which a deduction is available under section 40-25 of the ITAA 1997. The tax break will apply to this asset (subject to all other criteria being met). At the same time, Angus replaces the pump for the dam on his property which he uses principally for the purpose of conserving water.

Capital allowance deductions for the pump are available under Subdivision 40-F of the ITAA 1997 (which applies to water facilities used in primary production). Section 40-50 of the ITAA 1997 requires Angus to claim capital allowance deductions in relation to the pump under Subdivision 40-F rather than under Subdivision 40-B. The pump will not qualify for the tax break. Angus still benefits from being able to write off the pump over three years (as permitted under Subdivision 40-F) which is less than its effective life.

Buildings and capital works

Capital expenditure incurred in constructing capital works such as buildings and structural improvements for which a capital works deduction is available under Division 43 of the ITAA 1997 is not eligible for the tax break.

Example

Annie decides to build an extension on to her bakery to provide more space for customers to sit and eat. Annie is able to claim a deduction under Division 43 for the cost of constructing the extension, and so this expenditure would not be eligible for the tax break.

Whether or not a shop fit-out or aspects of it are eligible for the tax break depends on the facts and circumstances.

It is likely that much of a shop fit-out will be eligible for a capital works deduction under Division 43 of the ITAA 1997 and will therefore not qualify for the tax break. If an item forms part of the premises it would likely be eligible for a deduction under Division 43 and not section 40-25 of the ITAA 1997.

It is a question of fact and degree as to whether an item forms part of the premises. The following are relevant matters to consider when determining that question:

• whether the item appears visually to retain a separate identity
• the degree of permanence with which it has been attached
• the incompleteness of the structure without it, and
• the extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period.

Some structural improvements on land that is used for agricultural or pastoral operations, for example, fences and buildings used in the storage of hay, are not deductible under Division 43 of the ITAA 1997. Instead, a deduction for the decline in value of these depreciating assets is available under section 40-25 of the ITAA 1997. If you can claim a deduction for the decline in value of the asset, and meet the other eligibility requirements, you will be eligible for the tax break.

Are repairs eligible for the tax break?

Generally, expenditure incurred in repairing an income producing asset is immediately deductible under section 25-10 of the ITAA 1997, and thus would not be eligible for the tax break. Conversely, substantial improvements, additions, alterations, modernisations or reconstructions are generally not repairs. These types of expenditures may constitute a second element of an asset's cost under Subdivision 40-C of the ITAA 1997, and hence be eligible for the tax break.

Taxation Ruling TR 97/23 provides guidance on what types of expenditures can be deducted under section 25-10.

Assets that receive deductions under the Research and Development provisions

Normally an asset is not eligible for capital allowance deductions under Division 40 of the ITAA 1997 to the extent that it receives deductions under the Research and Development (R&D) provisions contained in the Income Tax Assessment Act 1936.

This would mean that while an asset that is partly used for R&D would qualify for the tax break, an asset that is used exclusively for R&D would be excluded. An incentive to reduce the R&D-related use of an asset (in order to claim the tax break) would be counter to the overarching intent of the R&D provision of promoting innovation.

Tangible depreciating assets are not precluded from the tax break merely because they receive a deduction under the R&D provisions. However, the 'purpose test' will still need to be met in order for such assets to qualify.

Cars

For individuals and partnerships including at least one individual taxpayer, there are four methods that you can use to work out deductions for car expenses for an income year. The choice of method will determine whether you can claim capital allowance deductions under Division 40 of the ITAA 1997 in relation to the car.

If you use the 'one-third of actual expenses' and 'log book' methods, you are able to claim deductions under section 40-25 of the ITAA 1997 and may be eligible for the tax break.

If you use the '12% of original value' or 'cents per kilometre' method to determine your car expenses, you are not eligible for capital allowance deductions under Division 40.

However, you will not be excluded from the tax break merely because you use the 12% of original value method. That is, the legislation rules these cars 'in' for the purposes of the tax break even though a deduction is not available under section 40-25.

Whether you use the one-third of actual expenses, log book or 12% of original value method, you still need to satisfy the purpose test before you can claim the tax break. For more information see Was the purpose test satisfied?

You cannot claim the tax break in an income year you use the cents per kilometre method. However, this method can only be used for up to 5,000 business kilometres, implying limited business use. That is, if you are using this method, you would generally find it difficult to meet the purpose test and so would not be eligible for the tax break anyway.

In comparison, the 12% of original value method can only be used if you travel more than 5,000 business kilometres.

Example

On 20 March 2009, Bernard acquires a station wagon to use in his mobile computer repair business. Because he does not keep a logbook or adequate car expense records, he cannot use either the log book or one-third of actual expenses methods. However, he can still use the 12% of original cost method to work out his car expense deductions for the 2008-09 income year.

Bernard cannot claim a deduction under section 40-25 for the car's decline in value for the 2008-09 income year. However, he will still be able to claim the tax break if he can satisfy all of the other criteria.

If you carry on business other than as an individual or in a partnership including at least one individual taxpayer (for example, through a company or trust), these rules do not apply to you. You will be able to claim the tax break for a car if you meet all the eligibility criteria.

Assets held by small business entities - small business pools

A 'small business entity' that allocates an asset to a small business pool would not be entitled to a capital allowance deduction under section 40-25 of the ITAA 1997 in relation to that asset, receiving instead a deduction for the pool under Subdivision 328-D of the ITAA 1997.

A small business that uses the capital allowances rules in Subdivision 328-D can still be eligible for the tax break if the asset would otherwise have been deductible under section 40-25 had the business not chosen to use Subdivision 328-D.

A small business entity does not have to stop using the capital allowances rules for small business entities to be eligible for the tax break in relation to the asset. It is the fact that the asset is one for which a deduction would be available under section 40-25 that matters.

Summary of eligible and non-eligible assets

The following table provides a general summary of the kinds of assets that may be eligible for the tax break subject to all other eligibility criteria being satisfied, and those that are not eligible.

Eligible	Not eligible
Tangible depreciating assets for which a deduction is available under section 40-25 of the ITAA 1997 including: cars (except those using the 'cents per kilometre' method). Tangible depreciating assets used by small business entities Tangible depreciating assets used in R&D	Intangible assets such as computer software and intellectual property rights Cars using the 'cents per kilometre' method Land and trading stock Capital works - buildings, construction expenditure, earthworks Water facilities

For more information about depreciating assets: Guide to depreciating assets TR 2009/4 - Income tax: effective life of depreciating assets (applicable from 1 July 2009).

Sections within Detailed explanation

• What is an eligible asset?
• What is new investment?
• Which taxpayer is entitled to the tax break deduction?
• Assets used by connected entities or affiliates in carrying on a business
• Which new investment threshold applies?
• What can be counted towards the threshold?
• What is a recognised new investment amount?
• Has the relevant new investment threshold been satisfied?
• Calculating the bonus deduction
• Small business and general business tax break: compliance, penalties and interest charges