House of Representatives

Explanatory Memorandum

(Circulated By Authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 3 - Small business entities' deductions for motor vehicles

Outline of chapter

3.1 Schedule 3 to this Bill 2011 amends the Income Tax Assessment Act 1997 (ITAA 1997) to allow small business entities to claim an accelerated initial deduction for motor vehicles acquired in the 2012-13 and subsequent income years.

3.2 All legislative references in this chapter are to ITAA 1997 unless otherwise specified.

Context of amendments

3.3 Small businesses can choose to use the capital allowance arrangements in Subdivision 328-D to depreciate assets, including motor vehicles.

3.4 As part of the 2011-12 Budget, the Government announced that small business entities would be allowed to bring forward a deduction of up to $5,000 for any motor vehicles purchased in the 2012-13 and subsequent income years. The remainder of the purchase value of the motor vehicle is depreciated through the general small business pool at 15 per cent in the first year and 30 per cent in later years.

3.5 Motor vehicles are a significant capital item for many of Australia's 2.7 million small businesses. This accelerated initial deduction delivers benefits by improving cash flow and helping small businesses to reinvest and grow their businesses.

Summary of new law

3.6 From the 2012-13 income year, small business entities that choose to use the capital allowance provisions in Subdivision 328-D can claim up to $5,000 as an immediate deduction for a motor vehicle in the year they start to use the motor vehicle, or have it installed ready for use, for a taxable purpose. Taking into account the amount already written off, the remainder of the purchase cost is depreciated as part of the general small business pool, at 15 per cent in the first year and 30 per cent in later years. This is an exception to the general small business capital allowance rules for depreciating assets.

Comparison of key features of new law and current law

Detailed explanation of new law

What is a motor vehicle

3.7 A motor vehicle is defined by subsection 955-1(1) to be any motor powered road vehicle (including a four wheel drive vehicle). This is not limited to new motor vehicles.

3.8 Motor vehicles do not include road vehicles if the main function of the road vehicle is not related to public road use or if the vehicle's ability to travel on a public road is secondary to its main function.

3.9 Examples of motor vehicles that can be written off under the small business depreciation for motor vehicles provisions include:

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cars;

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trucks;

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vans;

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utilities;

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motorbikes; and

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scooters.

3.10 Examples of vehicles that cannot be written off under the small business deprecation for motor vehicles provisions include:

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road rollers;

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graders;

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tractors;

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combine harvesters;

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earthmoving equipment; and

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trailers.

Example 3.8 : The main function of a motor vehicle is related to public road use

Adam and John own a civil engineering business that is a small business entity. They purchase a truck and a mini excavator. The truck is a road vehicle and its main function is to transport soil to and from work sites. The mini excavator is used to dig and move soil around work sites. Sometimes the mini-excavator travels small distances on public roads between sites - however, this is secondary to its main function. Therefore, the truck is a motor vehicle that can be written off under the special small business motor vehicle depreciation rules, but the mini-excavator is not.

Current depreciation regime

3.11 Under the existing law small business entities that choose to use the capital allowance arrangements in Subdivision 328-D can write off low cost assets - that is, assets costing less than $1,000 - in the income year in which they start to use the asset or have it installed ready for use.

3.12 This Schedule amends the current law to increase the threshold for a low cost asset to $5,000 and then further increases it to $6,500. The result is that in the year a small business starts to use the depreciating asset or has it installed ready for use, for a taxable purpose, the small business can deduct the taxable purpose proportion of the adjustable value of depreciating assets, such as motor vehicles, that cost less than $6,500.

3.13 Furthermore, this Schedule allows small businesses to allocate depreciating assets costing $6,500 or more to the general small business pool to be depreciated at a rate of 15 per cent of the taxable purpose proportion of the adjustable value of the asset in the year of allocation to the pool. In other years the deduction is calculated using a rate of 30 per cent.

3.14 The total balance of the general small business pool can be written off when it falls below $6,500.

Application to motor vehicles

3.15 The existing capital allowance rules (as amended by this Schedule) apply to motor vehicles as depreciating assets. For motor vehicles costing less than the instant asset write-off threshold a small business can write off the taxable purpose proportion of the adjustable value of the motor vehicle under subsection 328-180(1) in the year it starts to use the motor vehicle, or have it installed ready for use, for a taxable purpose. Where that is the case, the special rules for motor vehicles do not apply. [Schedule 3, item 3, paragraph 328-237(1)(d)]

3.16 The existing capital allowance rules also determine how to treat second element costs of a motor vehicle.

3.17 The disposal of a motor vehicle that has been written off in full under subsection 328-180(1), requires a small business to include the sale amount in their assessable income.

Special rules for certain motor vehicles

Deductions in the year the small business starts to use the motor vehicle

3.18 Small business entities can claim up to $5,000 as an immediate deduction for motor vehicles in the year they start to use the motor vehicle, or have it installed ready for use, for a taxable purpose ('start year'). [Schedule 3, item 3, subsection 328-237(1)]

3.19 Small businesses cannot use these rules if their motor vehicle can be written off immediately under subsection 328-180(1), that is, motor vehicles that are written off under the instant asset write-off. [Schedule 3, item 3, paragraph 328-237(1)(d)]

Example 3.9 : A motor vehicle that is written off under the instant asset write-off

Assume that the instant asset write-off threshold is $6,500.

Barry's Gardening Services is a small business entity and in the 2013-14 income year purchases a second-hand ute for $6,000 to transport the business' gardening tools. The vehicle is used only for business purposes. Barry's Gardening Services claims a deduction for the full value of the ute ($6,000) in the start year under subsection 328-180(1).

3.20 Where small businesses use the depreciation rules in Subdivision 328-D, all motor vehicles that are not subject to subsection 328-180(1) are allocated to the general small business pool in the start year under the existing law.

3.21 Once in the pool, the deduction available in the start year depends on the amount of the taxable purpose proportion of the adjustable value of the motor vehicle. [Schedule 3, item 3, subsections 328-237(2) to (4)]

Treatment if the taxable purpose proportion of the adjustable value is more than $5,000

3.22 Where the taxable purpose proportion of the adjustable value of a motor vehicle is more than $5,000, the deduction for the start year, comprises of:

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$5,000; and

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15% × ((the taxable purpose proportion × the adjustable value of the motor vehicle) - $5,000).

[Schedule 3, item 3, subsections 328-237(2) and (4)]

Example 3.10 : Initial deduction for a motor vehicle in the start year

Flynn's Courier Service is a small business entity and in the 2012-13 income year purchases a small second hand vehicle for $14,000 to assist with deliveries. The vehicle is only used for business purposes. Flynn's Courier Service calculates its start year deduction in the following way:

$5,000 + 15% × ((100% × $14,000) - $5,000) = $6,350

In the 2012-13 income year, Flynn's Courier Service can claim a deduction of $6,350 for the motor vehicle.

Example 3.11 : Deduction for a motor vehicle with partial taxable purpose use in the start year

Following on from the previous example, in the 2014-15 income year Flynn's Courier Service purchases a new motor vehicle for $30,000 to help with larger deliveries. Flynn estimates that 20 per cent of his use of the motor vehicle is for private purposes, and 80 per cent is for taxable purposes. Flynn's Courier Service calculates its start year deduction in the following way:

$5,000 + 15% × ((80% × $30,000) - $5,000) = $7,850

In the 2014-15 income year, Flynn's Courier Service can claim a deduction of $7,850 for the new motor vehicle.

3.23 The calculation of 15 per cent of the taxable purpose proportion of the adjusted value of the motor vehicle aligns with the current depreciation of assets allocated to the general small business pool. However, the deduction claimed under this process is in place of the deduction under the existing subsection 328-190(2). No deduction can be claimed under that subsection in the start year. [Schedule 3, item 1, subsection 328-190(2A)]

Taxable purpose proportion of the adjustable value is $5,000 or less

3.24 If a small business purchases a motor vehicle to which the special motor vehicle rules apply and allocates it to the general small business pool, but the amount of the taxable purpose proportion of the adjusted value is $5,000 or less, the deduction in the start year is that amount. [Schedule 3, item 3, subsections 328-237(2) and (3)]

3.25 As the start year deduction is for the full deductible amount, there is no remaining amount to depreciate through the general small business pool. However, as the motor vehicle was added to the pool, the proceeds from any subsequent disposal of that vehicle reduce the pool value rather than form part of the assessable income of the taxpayer.

Example 3.12 : Initial deduction for a motor vehicle in the start year where the taxable purpose proportion results in a deduction of less than $5,000

Digby's Builders is a small business entity and in 2013-14 it purchases a second hand utility for $8,000. The cost of the utility means Digby's Builders allocates it to the general small business pool. Digby also enjoys many outdoor adventure leisure activities and often uses the utility to carry equipment, and travel to and from these private activities. He estimates that 40 per cent of his use of the motor vehicle is for private purposes and 60 per cent for taxable purposes. Digby's Builders calculates its start year deduction in the following way:

60% × $8,000 = $4,800

In the 2013-14 income year, Digby's Builders can claim a deduction of $4,800 for the utility (which is equal to the amount initially allocated to the general small business pool).

The general small business pool value is less than the instant asset write-off threshold in the year the motor vehicle is allocated to the pool

3.26 Section 328-210 operates to allow a deduction for the full amount of the general small business pool where the balance of the pool falls below the threshold, which (as amended by this Schedule) is $6,500.

3.27 If, in the year the motor vehicle is allocated to the general small business pool (the start year), the pool is a low value pool (that is, the deduction that can be claimed for the pool is less than $6,500 but more than zero), the deduction is claimed under section 328-210 rather than the special motor vehicle rules in this Schedule. [Schedule 3, item 3, subsection 328-237(5)]

Example 3.13 : The amount of the deduction for the general small business pool is less than $6,500 in the start year

Hans' Florist is a small business entity. In the 2013-14 income year, Hans buys a second hand van for $7,000 for flower deliveries. Hans only uses the van for business purposes. In the same year, Hans' Florist sells a large display refrigerator from his florist shop for $1,700. The opening pool balance for the year was $1,000. Under the existing calculations, Hans' florist works out the deduction for the general small business pool:

$1,000 + $7,000 = $8,000 - $1,700 = $6,300

Hans' Florist can claim a deduction for the general small business pool of $6,300, writing off the entire value of the pool.

The deductions for the motor vehicle are included in that deduction for the general small business pool and no further deductions are available for the van.

Deductions for income years other than the start year

3.28 Consistent with the current law, once the motor vehicle is allocated to the general small business pool and a 15 per cent deduction has been received for the start year, it forms part of the pool that is depreciated at a rate of 30 per cent per year.

Example 3.14 : Motor vehicle depreciation in the start year and later years

Ruth's Creative Storage Solutions Pty Ltd is a small business entity. Ruth's Creative Storage Solutions purchases a utility vehicle in the 2012-13 income year for $25,000, which is wholly used for the business. The business' deduction for the motor vehicle for the 2012-13 income year is calculated in the following way:

$5,000 + 15% × ((100% × $25,000) - $5,000) = $8,000

In the 2012-13 income year, Ruth can claim a deduction of $8,000 for the utility.

In the 2013-14 income year, the remaining value of the utility ($25,000 - $8,000 = $17,000) forms part of Ruth's general small business pool and is depreciated at a rate of 30 per cent.

3.29 The general small business capital allowance rules apply to cost addition amounts of depreciable assets, including motor vehicles.

Disposal of motor vehicle and writing off the pool balance

3.30 For income years other than the start year, all other existing rules relating to the general small business pool, including those that relate to asset disposal and writing off the pool balance, continue to operate.

3.31 If a motor vehicle has been allocated to the general small business pool and the small business then sells the motor vehicle, the balance of the pool must be adjusted by the sale amount.

Example 3.15 : Sale of a motor vehicle that is allocated to the general small business pool

Following on from Example 3.7, Ruth's Creative Storage Solutions sells its utility in the 2014-15 income year for $14,000. As a result, Ruth's Creative Storage Solutions must decrease the value of its general small business pool by $14,000.

3.32 Where the general small business pool balance falls below $6,500, the total balance can be immediately written off. If the closing balance of the general small business pool is less than zero, then the amount by which the balance is less than zero is added to the taxpayer's assessable income for that income year, and the closing pool balance is taken to be zero.

Roll-overs

3.33 Existing section 328-250 addresses roll-over relief for certain balancing adjustment events by working out the amounts that a small business entity (a transferor or a transferee) can deduct for a depreciating asset that the transferor or transferee started to use or have installed ready for use for a taxable purpose in an income year in which the balancing adjustment event occurred.

3.34 Section 328-250 applies to deductions for low cost assets and assets that are pooled. Depending on their value, motor vehicles fall into one of these categories. [Schedule 3, items 4 to 6, subsections 328-250(1) and (2) and paragraph 328-250(3)(b)]

Application and transitional provisions

3.35 These amendments commence the day this Bill receives Royal Assent.

3.36 These amendments apply for motor vehicles that small businesses start to hold in the 2012-13 and later income years. [Schedule 3, item 7]

Consequential amendments

3.37 Consequential amendments are made to the ITAA 1997 to clarify the application of the write off of motor vehicles by small businesses from the 2012-13 income year. [Schedule 3, item 2]