Practice Statement Law Administration

PS LA 2003/8

Practical approaches to low-cost business expenses

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

This Practice Statement explains the threshold rule and the sampling rule taxpayers can apply to determine if their business expenses on low-cost items are to be treated as revenue expenditure.

1. General qualifications

This Practice Statement does not apply to taxpayers using the simplified depreciation rules for small business, as they can claim an immediate deduction for most depreciating assets costing less than the instant asset write-off threshold amount.

This Practice Statement does not apply to expenditure incurred on:

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establishing a business or business venture or building up a significant store or stockpile of assets

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assets held under lease, hire purchase or similar arrangement

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assets leased or hired to another entity

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assets included in an asset register

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any asset that forms part of a collection of assets, or

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trading stock or spare parts.

This Practice Statement also does not apply to component parts of composite assets (those items that would not normally be separate assets, such as scaffolding clamps).

2. Threshold rule

Expenditure of up to $100 to acquire an asset for business use can be treated as revenue expenditure. The threshold of $100 is inclusive of any goods and services tax included in the price of the item.

Some examples of low-cost items covered under the threshold rule include:

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office equipment – such as hand-held staplers, hole punches, manila folders, ring binders, geometry sets, stencils, calculators, tape dispensers, scissors, labelling machines and barcoding machines

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catering items – such as cutlery, crockery and table linen

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small tools – such as pliers, screwdrivers, hammers, secateurs, goggles and torches.

3. Sampling rule

Taxpayers with a low-value pool^[1] may use the sampling rule to determine the proportion of the total purchases on low-cost assets that are revenue expenditure.

The sample remains valid for 3 years (including the income year in which the sampling takes place), provided the nature of the purchases does not change to the extent that the sampling becomes inaccurate. If the purchases change significantly or if the business has merged or demerged and the previous sample would no longer deliver reliable or consistent results, the taxpayer will need to take a new sample.

Statistical sampling will not be regarded as an alternative where the business' current systems result in reliable individual identification and accounting of low-cost items.

Eligibility

Purchases that cost less than $1,000 and are not excluded by the general qualifications are eligible for sampling.

There are 2 options to calculate the sample but, whichever is used, the sample must be representative of the total population from which it has been drawn. The sampling results must be statistically valid and result in objective, reliable and conservative estimates.

The sampling results can only be applied against eligible purchases. The revenue component is assessed for immediate deductibility under the general deduction provisions. The capital component that relates to depreciating assets is dealt with under the low-value pool provisions.

The threshold rule can be used to assist with the revenue or capital expenditure decision for the sample.

Option 1 – using a percentage

The first option is to extract a representative percentage sample from eligible purchases of an income year. From the sample, determine the percentage that is deemed to be revenue.

As a general rule, we consider a representative sample of 10% of eligible purchases as being sufficient. It may be appropriate to use a lower or higher percentage, depending on the total number of eligible purchases.

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Example 1 – using a percentage

A business records $100,000 worth of revenue and capital purchases in an income year.

Individual items costing $1,000 or more (totalling $15,000) are excluded from the sampling. A further $50,000 worth of trading stock is also excluded, leaving $35,000 worth of eligible purchases.

Analysing 10% of the eligible purchases shows that revenue expenditure is 40%. By applying this to the $35,000 worth of eligible purchases, the business can claim an immediate deduction of $14,000 (40% of $35,000).

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Option 2 – using a time period

The second option allows the taxpayer to choose a sample comprising all eligible purchases for a given period (for example, 2 months) in an income year that is representative of the capital and revenue purchases for the business. From the sample, determine the percentage that is deemed to be revenue.

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Example 2 – using a time period

A business has purchases for an income year totalling $2.5 million. Of this amount, $300,000 relates to items that each cost $1,000 or more; and a further $1 million is trading stock. Neither of these are eligible purchases for the sampling rule, so the purchases that are eligible total $1.2 million.

The business identifies all eligible purchases for a representative 2-month period in that year. In that period, 35% of the eligible purchases are shown to be revenue items.

Applying the 35% for the 2-month sample period, the business can claim an immediate deduction of $420,000 (35% of $1.2 million).

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4. More information

For more information, see:

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Uniform capital allowance system for low-value pools

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Simpler depreciation rules for small business.

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Amendment history

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© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Date of Issue: 16 September 2003

Date of Effect: 1 July 2000

File 2003/3044; 2003/4024; 2003/4027; 2003/5180; 2003/10178; 2003/11436; 2003/34733; 1-16YJO8MS

Other References:
Simpler depreciation rules for small business
Uniform capital allowance system for low-value pools

Legislative References:
ITAA 1997 Subdiv 40-E

Business Line:  Small Business

ISSN: 2651-9526