Guide to small business and general business tax break

Overview

The Small Business and General Business Tax Break measure has been passed by Parliament and is now law. The measure was announced on 3 February 2009 as part of the Government's Nation Building and Jobs Plan. It provides an additional deduction for business investment in new, tangible depreciating assets and new expenditure on existing assets.

The Small Business and General Business Tax Break (the tax break) is one of the measures implemented by the government to support economic activity and employment in Australia and stimulate new capital investment by Australian businesses in the face of a deteriorating global economic environment.

Available for new investment in eligible, tangible depreciating assets

Generally, the tax break is available for new investment in tangible depreciating assets for which a capital allowance deduction is available under Subdivision 40-B (specifically, section 40-25) of the Income Tax Assessment Act 1997 (ITAA 1997). For more information see What is an eligible asset? and What is new investment?

Investment thresholds apply

New investment in an asset must be made between 13 December 2008 and 31 December 2009 for any deduction to apply and the amount of your investment in an asset needs to meet a certain threshold. The 'new investment threshold' is:

• $1,000 for small business entities, and
• $10,000 for all other business.

For the purposes of meeting the thresholds, goods and services tax (GST) input tax credits are excluded. Therefore, all examples in this guide ignore any GST impact and all amounts are GST exclusive. See What is a recognised new investment amount? for more information.

Broadly, you are a small business entity if you have an aggregated turnover of less than $2 million for the current and/or the previous income year. For more information see Which new investment threshold applies?

Small business entity test - aggregated turnover Aggregated turnover is your annual turnover plus the annual turnovers of any businesses you are connected with or affiliated with. You must use the aggregation rules to work out if you need to include another business' annual turnover in your aggregated turnover. For more information, see What are the aggregation rules?

The cost of items forming part of a set and the cost of identical or substantially identical assets may be added together for the purposes of meeting the thresholds. All businesses can aggregate their investment in assets in this way, not just small business entities. For more information see What can be counted towards the threshold? and Has the relevant new investment threshold been satisfied?

Asset must be used principally in Australia for the principal purpose of carrying on a business

To claim the tax break, when you start to use the asset, or have it installed ready for use, it must be reasonable to conclude that you will use the asset principally in Australia for the principal purpose of carrying on a business. The tax break will not be reduced for any non-taxable use of the asset or apportioned based on the actual taxable use of the asset over a particular income year. For more information about the meaning of 'principal purpose of carrying on a business' see ATO Interpretative Decision ATO ID 2009/47.

Assets acquired for the purposes of resale If you acquire an asset for the purposes of resale within a short time frame, it is likely that the asset would not meet the requirement that it will be used for the principal purpose of carrying on a business. In this situation, you are not entitled to claim the tax break.

An asset does not necessarily have to be located in Australia when you start to use it or have it installed ready for use. However, the purpose test will not be satisfied if it is reasonable to conclude that the asset will never be used in Australia. For more information see Was the purpose test satisfied?

Personal Services Income - individuals generating personal services income but not conducting a personal services business As a result of the operation of the personal services income (PSI) legislation, if you are an individual who generates PSI but do not pass one of the four personal services business tests and do not have a personal services business determination from the Commissioner, you will not be entitled to claim the tax break in relation to your PSI. The PSI legislation provides that individuals who are not conducting a 'personal services business' cannot deduct certain amounts such as amounts that employees cannot deduct relating to their PSI. An employee cannot claim the small business and general business tax break. For more information about Personal services income see our website and section 85-10 of the ITAA 1997.

Personal Services Income - personal services entities in business but not conducting a personal services business If you are a 'personal services entity' (company, partnership or trust) carrying on business and in receipt of PSI, but do not meet any of the four personal services business tests and have not received a personal services determination, you (the entity) will be entitled to a deduction for the tax break if you meet all other eligibility requirements. In relation to partnerships deriving PSI, to be eligible to claim the tax break in relation to PSI, the asset must be a partnership asset and not held by an individual partner. Individual partners in receipt of PSI will be subject to section 85-10 of the ITAA 1997 which has the effect of disallowing entitlement to the deduction against PSI. For more information see section 86-60 of the ITAA 1997 and Taxation Ruling TR 2003/10 paragraph 100.

What rate of deduction applies?

If you are a small business entity, the tax break is worked out using a rate of 50%. If you are not a small business entity, the tax break is worked out using a rate of either 30% or 10% depending on when you committed to investing in the asset and used it, or installed it ready for use.

Provided all of the eligibility criteria are satisfied for the income year, the tax break can be claimed as a tax deduction in the income tax return for the income year in which the asset is first used or installed ready for use.

The following gives more detail on how to work out the rate of deduction that applies:

Small business entities

To qualify for the 50% deduction, you must:

• be a small business entity for the income year in which you commit to the investment, put the asset to use or claim the tax break
• commit to investing in the asset between 13 December 2008 and 31 December 2009
• meet your 'new investment threshold', and
• first use the asset or have it installed ready for use, or (in the case of new investment in an existing asset) bring the asset to its modified or improved state, on or before 31 December 2010.

Other business entities:

To qualify for the 30% deduction you must:

• commit to investing in the asset between 13 December 2008 and 30 June 2009
• meet your 'new investment threshold', and
• first use the asset or have it installed ready for use, or bring the asset to its modified or improved state, on or before 30 June 2010.

To qualify for the 10% deduction you must:

• commit to investing in the asset between 1 July 2009 and 31 December 2009
• meet your 'new investment threshold', and
• first use the asset or have it installed ready for use, or bring the asset to its modified or improved state, on or before 31 December 2010.

You will also qualify for the 10% deduction if you:

• commit to investing in an asset between 13 December 2008 and 30 June 2009, and
• first start to use the asset or have it installed ready for use, or bring the asset to its modified or improved state, after 30 June 2010 but on or before 31 December 2010.

The following table summarises the key dates relating to the different rates.

Business entity	Investment commitment time (inclusive)	Date of first use or installed ready for use (inclusive)	Rate
Small business	13 December 2008 to 31 December 2009	By 31 December 2010	50%
Other business	13 December 2008 to 30 June 2009	By 30 June 2010	30%
	1 July 2009 to 31 December 2009	By 31 December 2010	10%
	13 December 2008 to 30 June 2009	1 July 2010 to 31 December 2010	10%

For more information see Calculating the bonus deduction.

Generally, a business 'commits' to investing when: it enters into a contract under which the asset will be held or improved; it starts to construct the asset or improvement; or starts to hold the asset in some other way. For more information see When is an investment considered to occur?

Hire purchase arrangements and luxury car leases If you are not a small business entity (that is, you have a turnover of $2 million or more), you intend to acquire a depreciating asset under a hire purchase arrangement or enter into a luxury car lease and want to claim the 30% business tax break, you need to enter into the hire purchase arrangement or lease agreement by 30 June 2009, not just make an order contract with the supplier by that date. If you are a small business entity, you will have until 31 December 2009 to enter into the hire purchase arrangement or lease agreement under which you will hold the asset to be eligible for the tax break. For more information see When is an investment considered to occur?

Claiming the tax break

Provided all of the eligibility criteria are satisfied for the income year, the tax break can be claimed as a tax deduction in the income tax return for the income year in which you first use the asset or have it installed ready for use. This also applies to entities using a substituted accounting period.

The deduction will be claimable at the new 'Small business and general business tax break' label. Please refer to the relevant return instructional guides for more information when it is time to claim the deduction.

The tax break and effect on decline in value, balancing adjustment amounts and capital gains or capital losses

The tax break deduction is in addition to deductions for the decline in value you are entitled to claim for the asset. The tax break will not be taken into account in working out the amount of any balancing adjustment amounts, capital gains or capital losses when you stop holding the asset.

The tax break and your pay as you go (PAYG) instalments

Your PAYG instalment rate or amount as calculated by us will not be adjusted to add back the additional deduction for investment in new, tangible depreciating assets and new expenditure on existing assets. It was decided that the additional deduction would be treated the same way as any other deduction for PAYG instalment purposes. If this rate or amount is insufficient to meet your income tax liability for the income year, you may simply pay the balance owing when your income tax return is assessed.

Alternatively, you can vary your PAYG instalment rate or amount to better reflect your end of year tax position. You can be confident that an incorrect variation general interest charge will not be imposed if reasonable steps are taken to get the variation right. Generally, for a variation to be reasonable you are expected to have based your calculation on the best available information and on the basis that best reflects your likely tax outcome at the time.