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 (e.g. 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 that is deemed to be revenue.
As a general rule, the Tax Office would consider a representative sample of 10% of eligible purchases as being sufficient for purposes of the first option. Where there is a very large number of eligible purchases, a lesser percentage may also 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. The capital component relating to depreciating assets is dealt with according to the low-value pool provisions of Subdivision 40-E of the ITAA 1997.
A large business has purchases for the income year totalling $2,500,000. Of this amount, $300,000 relates to items costing $1,000 or more. These items cannot be used for sampling. Purchases totalling a further $1,000,000 are excluded from the sampling as being trading stock.
The business identifies all eligible purchases for a representative two month period in that year.
Analysis of those eligible purchases indicates that the revenue expenditure proportion is 35%.
Applying the 35% revenue proportion for the two month sample period to the total value of eligible purchases in the income year ($1,200,000, or $2,500,000 less the $1,300,000), the business claims an immediate deduction of $420,000 (35% of $1,200,000) and allocates the remaining $780,000 to the low-value pool.