The first option is to extract a representative sample from the eligible purchases of an income year, and from this sample determine the percentage that is deemed to be revenue.
The second option allows the taxpayer to choose a sample comprising all eligible purchases for a period (for example, two months) in an income year that is representative of the capital and revenue purchases for the business over the course of the year. From this sample you can decide the percentage deemed to be revenue.
As a general rule, the ATO would consider a representative sample of 10% of eligible purchases as sufficient for the purposes of the first option. Where there are a very large number of eligible purchases, a lesser percentage may be appropriate. Similarly, where there is only a limited number of eligible purchases a higher 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 and the capital component relating to depreciating assets is dealt with according to the low-value pool provisions of Subdivision 40-E.
A small/medium business identifies $100,000 worth of purchases in a year. These purchases include both revenue and capital items purchased in a year.
Items costing $1,000 or more total $15,000 and these items are excluded for the purposes of sampling. Purchases totalling a further $50,000 are excluded from the sampling as they are trading stock.
Using statistical sampling, the business identifies that 10% of items that are eligible purchases would be a representative sample for them. Therefore the revenue expenditure proportion is 40%.
Applying this proportion to the total value of the eligible purchases ($35,000, or $50,000 less $15,000), the business claims an immediate deduction of $14,000 (40% of $35,000) and allocates the remaining $21,000 to the low-value pool.