If you purchase a large number of items for your business and use a low-value pool, you may be able to use the sampling rule to estimate how many of your purchases you can claim as an immediate deduction and how many you must depreciate over time.
What is the sampling rule
The sampling rule saves you time because you don't need to decide whether each purchase is of a:
- revenue nature – these are items you expect to be consumed, damaged or lost within a short period of time. Revenue nature items are immediately deductible.
- capital nature – these are item you expect to be used over a longer period. These must be written off over time.
When you wouldn't use the sampling rule
If you're using the small business simplified depreciation rules, generally you won't use the sampling rule for low-value pools. Under the simplified depreciation rules, you can:
- claim an immediate deduction for most depreciating assets costing less than $1,000 (or $20,000 for each asset bought and used, or installed ready for use from 7.30 pm (AEST) on 12 May 2015 until 30 June 2017)
- pool most other depreciating assets.
If you are a small business entity you:
- can use the simplified depreciation rules for 2007–08 and later years
- must use the simplified depreciation rules for 2006–07 and earlier years.
Who can use the sampling rule
Businesses can use the sampling rule if they both:
- have a low-value pool
- don't have systems that provide reliable individual identification and accounting of low-cost items.
How the sampling rule works
A business with a low-value pool under Subdivision 40-E of the Income Tax Assessment Act 1997 (ITAA 1997) may use statistical sampling to determine the proportion of the total purchases on low-cost tangible assets that are revenue expenditure.
Eligible purchases
The purchases eligible for sampling are those that are both:
- items costing less than $1,000
- not excluded by the general qualifications.
The 'cost' for these purposes is the cost as worked out under Division 40 of the ITAA 1997. Input tax credits and decreasing adjustments under GST are normally excluded (see Division 27 of the ITAA 1997).
Sampling options
There are 2 options:
- The first option is to extract a representative sample from the eligible purchases of an entire income year.
- The second option allows you to choose a sample comprising all eligible purchases for a period (for example, 2 months) that is representative of the purchases for the income year.
From either sample, you determine the percentage of purchases that are deemed to be revenue. You can use the threshold rules to help with the revenue/capital expenditure decision for the sample.
Generally, we would consider a representative sample of 10% of eligible purchases as sufficient for the purposes of the first option. If there are a:
- very large number of eligible purchases, a smaller percentage may be appropriate
- small number of eligible purchases a larger percentage may be required.
The sampling results can only be applied against eligible purchases. The
- revenue component is assessed for immediate deductibility under section 8-1 of the ITAA 1997
- capital component is dealt with according to the low-value pool provisions of Subdivision 40-E.
Example: small or medium business
A small/medium business identifies $100,000 worth of revenue and capital items purchased in a year. The business determines that 10% of items that are eligible purchases would be a representative sample. They analysis the sample and determine the revenue expenditure proportion is 40%.
There are $15,000 worth of items costing $1,000 or more which are excluded from sampling. A further $50,000 worth of items are excluded as they are trading stock. This leaves $35,000 worth of eligible revenue expenditure.
Applying this 40% proportion to the $35,000 of eligible purchases, the business:
- claims an immediate deduction of $14,000 (40% of $35,000)
- allocates the remaining $21,000 to the low-value pool.
Example: Large business
A large business has purchases for the income year totalling $2,500,000. Excluded from sampling are:
- $300,000 of purchases relates to items costing $1,000 or more
- $1,000,000 of purchases which are trading stock.
This leaves $1,200,000 worth of eligible purchases.
The business identifies all eligible purchases for a representative 2-month period in that year. Analysis of these shows that the revenue expenditure proportion is 35%.
Applying the 35% revenue proportion to the $1,200,000 worth of eligible purchases, business:
- claims an immediate deduction of $420,000
- allocates the remaining $780,000 to the low-value pool.
Qualifications
This sampling rule does not apply to expenditure on:
- establishing a business or business venture or building a significant store or stockpile of assets
- trading stock or spare parts
- assets held by you under a lease, hire purchase or similar arrangement
- assets acquired by you for lease or hire to (or that will otherwise be used by) another entity
- assets included in an asset register you maintain in a manner consistent with reporting requirements under accepted Australian accounting standards
- any asset that forms part of a collection of assets that is dealt with commercially as a collection (for example, by being sold and leased-back as a means of raising finance for the business).
This rule does not apply separately to expenditure on assets that are part of another composite asset. In this case, you must test expenditure on the composite asset. Items would not normally be a separate asset where they are not functional on their own (for example, scaffolding clamps).
The sampling results must be statistically valid and result in objective, reliable and conservative estimates.
Statistical sampling will be acceptable if:
- all relevant records and working papers relating to the sampling are available to us for examination
- an adequate statistical sampling design has been used
- the sample is representative of the population from which it has been drawn
- the data obtained from the sample is correct
- the estimates have been calculated correctly.
See also PS LA 2003/08 Taxation treatment of expenditure on low cost items for taxpayers carrying on a business.
Statistical sample validity
The statistical sample is valid for a maximum of 3 years (including the year in which the sampling takes place) so long as it remains representative of the total population that it is applied to. Re-sampling is required when, for example either:
- your business operations have varied so significantly that an alteration in the composition of asset purchases could be expected
- 2 businesses have merged, one of which was using the sampling rule and one of which was not
- 2 businesses have merged, both using the sampling rule but having different percentages of revenue expenditure, or
- there has been a demerger of a business.
Decentralised businesses
If your business is decentralised, with purchases of assets shown in different centres within your business, you may perform a sampling exercise for each centre and use the results for the purchases made by that centre. You may need to do this to ensure a representative sample if the eligible purchases of the centres have different characteristics. This is more likely to be an issue for larger businesses.
Record keeping requirements
The sampling rule doesn't change record retention requirements. You must continue to keep all relevant records as required under the income tax and other taxation laws.
Using sampling more broadly
The sampling rule has been designed to dovetail with the rules for low-value pools in Division 40 of the ITAA 1997. If you wish to use statistical sampling in other circumstances, you can contact us