The sampling rule is available to businesses that have a low-value pool. Some businesses can claim an immediate deduction for expenditure on assets costing less than $1,000 and would not use this rule.
The sampling rule is available to businesses that have a low-value pool.
If you're using the small business simplified depreciation rules, generally you won't use the UCA 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 7.30pm (AEST) on 12 May 2015 until 30 June 2017), and pool most other depreciating assets.
You can use the simplified depreciation rules if you are a small business entity (2007–08 and later years).
You must use the simplified depreciation rules for income years where you were in the simplified tax system (2006–07 and earlier years).
The sampling rule allows you to use a sample of your business purchases to estimate how much you can claim as an immediate deduction, and how much you must depreciate over time.
The rule is meant to help you save time as you don't need to decide whether each purchase is of a revenue nature (and so immediately deductible) or of a capital nature (usually written-off over time).
Purchases of a revenue nature normally mean you expect the item to be consumed, damaged or lost within a short period of time. Purchases of a capital nature generally result in the item or asset being used over a longer period.
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 result in 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.
The purchases eligible for sampling are both:
- purchases of items costing less than $1,000
- not excluded by the general qualifications set out later in this fact sheet.
Items costing less than $1,000 are eligible as they'll be allocated to the low-value pool if the expenditure on them is capital and they are depreciating assets. Accordingly, items costing $1,000 or more must be excluded for the purposes of the sampling calculations.
The 'cost' for these purposes is the cost worked out under Division 40, as that is the amount relevant for the purposes of the low-value pool. Input tax credits and decreasing adjustments under GST are normally excluded (see Division 27 of the ITAA 1997).
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 you 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 to be revenue.
As a general rule, we 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. 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.End of example
Example: Large business
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.End of example
You can use the threshold rule to help with the revenue/capital expenditure decision for the sample.
This sampling rule does not apply to expenditure on:
- establishing a business or business venture or building a significant store or stockpile of assets
- 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)
- trading stock or spare parts.
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).
You cannot use statistical sampling if your current systems result in reliable individual identification and accounting of low-cost items.
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.
The statistical sample is valid for a maximum of three 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
- two businesses have merged, one of which was using the sampling rule and one of which was not
- two businesses have merged, both using the sampling rule but having different percentages of revenue expenditure, or
- there has been a demerger of a business.
If your business is decentralised, so purchases of assets shown in eligible purchases are made 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.
The sampling rule doesn't mean record retention requirements are changed. You must continue to keep all relevant records as required under the income tax and other taxation laws.
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.
- PS LA 2003/08 Taxation treatment of expenditure on low cost items for taxpayers carrying on a business
- Capital allowances: low-cost assets – threshold rule for small business (NAT 9852)
- Capital allowances: low-cost assets – threshold rule for large business(NAT 9853)