On 13th December 2008, Australian businesses saw the return of the Investment Allowance, a tool first introduced in 1975 and then amended in various forms in the early ’80s and again in the early ’90s.
By way of background, the Investment Allowance is a fiscal tool used at times to encourage businesses to invest in capital equipment by granting businesses a special tax deduction. The investment allowance is only a tool that reduces taxable income. It is not a payment to the business and, as such, is not recorded in the calculation of profits.
As an example, Smart Coy Pty Limited reports an accounting profit of $300,000 (before tax), and as such has recorded an income tax expense of $90,000 (30%). If Smart Coy Pty Limited had invested in new equipment within the specified Investment Allowance period in the sum of $600,000 it would be entitled to a 10% Investment Allowance of $60,000.
This can be illustrated as:
Net Profit (Before Tax): $300,000
Less Investment Allowance: $60,000
Taxable Profit: $240,000
Tax @ 30%: $72,000
Past federal governments have introduced Investment Allowances as high as 40% of the capital value of the income deriving asset acquired – – although not to be this time around.
The introduction of the Investment Allowance has in part been due to stout lobbying by the Australian Chamber of Commerce and Industry; however, no doubt the Federal Government will take the kudos. Together with interest rates at lows not seen since 2001, there are now redeeming reasons to reconsider investment.
While the introduction is designed more as a stimulus to encourage business to invest in machinery, it does fall short of longer term tax reform that is clearly needed in Australia to bring it in line with other nations with whom Australia trades.
On the back of recent PIAA surveys and in addition to surveys carried out by other industries and the Australian Chamber of Commerce and Industry, it is clear the business community has become concerned about the softening outlook for investment in capital equipment.
Added to this is what could be described as a more stringent lending environment being imposed by banks and financiers on what in previous years would have been bankable transactions. Put bluntly, the credit markets have tightened.
The following is an extract from the Treasurer Wayne Swan’s media release to which I have added some explanations and deleted references to ITR subsections.
“The investment allowance will apply from 12:01am AEDT 13 December 2008 until the end of 30 June 2009. To be eligible for the investment allowance, a taxpayer must start to hold the asset under a contract entered into between those times, or start to construct the asset between those times. Assets must also be installed ready for use by the end of 30 June 2010.
Comment below to have your say on this story.
If you have a news story or tip-off, get in touch at editorial@sprinter.com.au.
Sign up to the Sprinter newsletter
