Legislation recently introduced in Federal Parliament – the Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Bill 2011 – proposes to enable SMEs to write-off certain assets faster for tax purposes.
Sounds good, but there is a small catch – the changes are dependent on the passage of the carbon tax legislation (now done) and the mining tax (not yet done).
The legislation would amend the tax law by:
- increasing the small business instant asset write-off threshold from the current limit of $1,000 to $6,500; and
- consolidating the long life small business pool and the general small business pool (ie. effectively depreciation) into a single pool to be written off at one rate of 30%. Currently, depreciating assets generally costing $1,000 or more are allocated to one of two depreciation pools, depending on the effective life of the asset: the long life small business pool or the general small business pool.
Under the changes, from 2012-13 (ie. from July 1, 2012), small businesses (ie. with annual turnover of less than $2 million) would be able to choose to use the capital allowance provisions in the tax law to write-off depreciating assets costing less than $6,500 in the income year in which they start to use the asset or have it installed ready for use for a taxable purpose during or before that income year.
Small businesses that choose to use the capital allowance provisions in the tax law would also be able to claim an immediate deduction for the taxable purpose proportion of additions to existing assets (that cost less than $6,500) if the addition itself also costs less than $6,500.
For example, during the 2012-13 income year, Joe's Deli buys a new refrigeration unit for $3,000. As the refrigeration unit is a depreciating asset and costs less than $6,500, the business can claim a $3,000 deduction for the 2012-13 income year.
The existing rules for the disposal of assets that have been totally written off would continue to apply.
For depreciating assets that cost $6,500 or more, small businesses will be able to allocate these to a single general small business pool and depreciated at a rate of 15% in the year of allocation and 30% in following years.
For example, during the 2012-13 income year, Fred's IT Whiz business buys a new computer for $6,800 that Fred uses 80% of the time for business purposes and 20% for personal purposes. Although the taxable purpose proportion of the computer is $5,440 (80% of $6,800), the business cannot claim an immediate deduction for this asset. To depreciate this asset, Fred would need to allocate $5,440 to the general small business pool for the 2012-13 income year.
The closing balance of a small business' long life pool and general small business pool for the 2011-12 income year will be added together to calculate the opening balance of the general small business pool for the 2012-13 income year.
The total balance of the pool will be able to be written off when it falls below $6,500. However, if the pool balance becomes less than nil, the amount by which the balance is less than zero will be added to the taxpayer's assessable income for that income year.
SME deductions for motor vehicles
The amending legislation proposes to amend the tax law to allow small business entities (annual turnover less than $2 million) to claim an accelerated initial deduction for motor vehicles (applies to new and second-hand vehicles) acquired in the 2012-13 and subsequent income years.
Under the proposed changes, from the 2012-13 income year, small business entities that choose to use the capital allowance provisions will be able to 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 will be depreciated as part of the general small business pool, at 15% in the first year and 30% in later years. It should also be noted that, once in the pool, the deduction available in the start year will depend on the amount of the taxable purpose proportion of the adjustable value of the motor vehicle.
The proposed rules will apply to any motor powered road vehicle, but will not apply to 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. Examples of motor vehicles that will be able to be written-off include: cars, trucks, vans, utilities, motorbikes and scooters. However, road rollers, graders, tractors, combine harvesters, earthmoving vehicles, and trailers, will not be able to be written off.
For example, a civil engineering business purchases 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.
It should not be forgotten that the rules do not only apply to eligible new vehicles. For example, a tree-lopping business may purchase a second-hand ute for $5,500 to transport its lopping tools. The vehicle is used only for business purposes. The business can claim a deduction for the full value of the ute ($5,500) in the start year.
The Bill has been referred to a Parliamentary committee for report by November 21, 2011, so the final outcome of its proposed amendments may not be known until later this year, or even early next year if the Bill is not passed before Parliament rises at the end of its 2011 sittings.
The amendments will be welcome to SMEs but, as always, there are some tricky provisions to come to grips with. As the amendments will generally apply from July 1, 2012 (assuming the mining tax legislation is passed), there is still some time for SMEs to consult their advisers on what the changes may mean for them.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions . 
For more Terry Hayes features, click here.
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