The Investment Allowance guide in plain English

Some smart businesses have already taken advantage of the government’s Investment Allowances for eligible vehicle and equipment purchases. Yet the actual details are still rather confusing to many. People are asking how to qualify and what equipment it applies to. To demystify the finer points, we’ve prepared this ‘Investment Allowance Guide in Plain English’.

Put simply, the Investment Allowances are an up-front tax deduction on top of the depreciation you are currently eligible to claim on a particular vehicle or piece of equipment.

Let’s imagine you want to buy a new $100,000 milling machine and the current depreciation you can claim in the first year is 15%. If you’re a small business turning over less than $2 million, you could benefit from an additional 50% allowance. So $65,000 would come off your bottom-line profit and reduce your tax bill. It’s that simple. To better understand it, here’s a step-by-step explanation.

Step one. What companies can benefit? Small businesses with a turnover under $2 million annually can claim the 50% allowance. For businesses turning over $2 million and more, there are two Investment Allowances. If you placed your order by 30 June 2009, you qualify for the 30% allowance. If you missed that deadline, there’s still a 10% allowance if you place your order by 31 December 2009. In both cases, you have 12 months after those respective deadlines to take delivery of the vehicle or equipment and have it installed ready for use.

Step two. What sort of items are we talking about? Any motor vehicles including trucks, commercials, passenger cars and fleet cars that you’ll use for your business. It also applies to new equipment and major upgrades of existing equipment — basically anything that makes you money can save you money under the allowance.

Step three. How much must you spend? For small businesses, the purchase amount for vehicles or equipment must be $1000 or more, while for larger businesses it must be $10,000 or over. They must be new or demonstrator items, not pre-owned or used.

Step four. You’d better step on it, because the deadline is fast approaching. You have until 31 December 2009 to make your purchase or at least place your order. Then what you buy must be installed and ready to use by 31 December 2010. If as a larger business, you had secured the 30% investment allowance by having already ordered before 30 June 2009, you have until 30 June 2010 to take delivery of the vehicles or equipment to retain that 30%.

Step five. Make sure you utilise the right finance product to pay for those assets that had been ordered but not delivered prior to the 30 June or 31 December 2009 order deadlines. These must be funded via ‘Chattel Mortgages’ and not ‘Commercial Hire Purchase’ or a ‘Lease’, otherwise businesses run the very real risk of having those Investment Allowances denied due to the asset being sold to the financier and not the customer who had placed the initial order.

These are the major points in a nutshell, but you should still speak with your accountant or tax adviser. Recent news reports suggest that the economy is on the way to recovery, so now would be a good time to consider equipping your businesses to capitalise on the upswing.

You may need to enlist the services of a specialist business finance broker to help secure the funds as credit is still tight. Remember to finance those assets in the correct structure to take advantage of the Investment Allowance.

*Mark O’Donoghue, Director, Finlease