Temporary 30% Investment Allowance "What does it mean"
Small Business and General Business Tax Bonus
To help Australian industry make some headway through difficult times, the Federal Government has introduced recent measures that can mean significant benefits for plastics processors considering purchasing new equipment.
The allowance gives businesses a one-off tax deduction equal to 30 per cent of the capital cost on eligible new equipment and motor vehicles with a purchase price of $10,000 or more. This is in addition to the standard depreciation claimed for such assets.
The equipment must be acquired or ordered between 13th December 2008 and 30th June 2009, and installed and ready for use by 30th June 2010.
Additionally, where companies have a turnover of $2million or less per annum, the allowance is available for assets with a purchase price of $1,000 or more.
When you consider these measures have come at a time of falling interest rates, they are likely to have a profound effect on the bottom line of a number of businesses."
Significant tax savings for plastics processors and related organisations.
To put this into perspective, let's take as an example the purchase of a $150,000 machine.
Purchase price $150,000
Immediate deduction: $ 45,000
Let's assume the business has a net profit of $100,000 in 2009. This deduction reduces the net profit from $100,000 to $55,000, a tax saving of $13,500 in year one ($100,000 x 30 percent tax rate = $30,000 versus $55,000 x 30 per cent tax rate = $16,500 therefore $30,000 - $16,500 = $13,500 tax saving).
Now, let's take this one step further and include the depreciation allowance that the business would claim in the 1st year on top of this one off allowance. Assume the small business entity concession rule applies (previously STS) and we will apply a 15 per cent diminishing value rate in the 1st year (thereafter 30 per cent). This means a further $22,500 deduction.
So for the example above, the total tax benefit is as follows:
Depreciation @ 15% $ 22,500
Investment Allowance @ 30% $ 45,000
Total 1st year deduction $ 67,500
This deduction reduces the net profit from $100,000 to $32,500, a tax saving of $20,250 in year one ($100,000 x 30 per cent tax rate = $30,000 versus $32,500 x 30 per cent tax rate = $9,750 therefore $30,000 - $9,750 = $20,250 tax saving), even if delivered in June 2009.
Bear in mind that the tax benefit varies depending on the value of machinery, the above example is a guide only and will vary company by company.
Interest rates at 40 year lows.
When you consider that with the recent falls in interest rates totaling 4% since September 08 (at time of going to press) these additional measures from the government add up to a significant stimulus.
This couldn't have come at a better time. Research indicates that purchases of new plastics related equipment declined significantly in recent months. Not only are credit markets tightening making it more difficult for companies to source funds. In addition, for many financial uncertainty right now is putting the purchase of new equipment on hold.
Yet there are big benefits to be gained by taking advantage of current market conditions. There's also the fact that the continuing fall of the Australian dollar could also mean that future equipment purchases could be significantly more expensive.
Buying opportunities on all types of equipment.
Right now there are real bargains to be found with equipment suppliers. There are opportunities to buy new plastics related equipment, motor vehicles and even computers while interest rates are low, plus you could receive a 30 per cent tax bonus. Replacing outdated equipment could help plastics companies work more efficiently and profitably.
Naturally individual companies need to do their own research to find out what benefits can be gained given their current trading conditions. At time of going to press, industry was still awaiting the finer details of the investment allowance package. Up to date information can be found by logging on to The Treasurer of the Commonwealth of Australia Website.
It will also pay to speak with your accountant and a finance broker that specialises in sectors like the plastics industry and that has an acute knowledge of the factors that exist in the industry right now.