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Why businesses shouldn’t bother with the 50% investment allowance

Well the Federal Budget came out last week and most pundits labeled it as a pretty tame affair particularly with respect to businesses. I have to agree.

There was no change for large business and the only significant change for small business was the extension and increase of the Small Business Tax Break – from 30 percent to 50 percent bonus deduction to small businesses (i.e turnover under $2 million) for assets acquired between 13 December 2008 to 31 December 2009.

The media have been raving about how great this measure is for small business. 50 percent extra deduction.  Sounds great doesn’t it?  Well I am not that excited for quite a few reasons as outlined below:

1.   To enjoy the bonus deduction your business has to outlay extra cash to buy the assets. With times being tough, cash is king. Don’t forget my A-B-C motto of money matters – Absolutely Bloomin’ Cash – a business with poor cash flow is going to struggle in the coming months and years. Why put pressure on your cash flow if you don’t need to?  I am predicting a lot of businesses will get their cash flow requirements wrong and get into strife, thus putting more pressure on the economy if businesses fail.

2.   So let’s say that you want to preserve your cash, and you want to finance the purchase instead. If you need to finance then you are merely putting more pressure on the business’ balance sheet and future cash flow commitments. Business finance is not cheap these days either despite the RBA reducing the benchmark interest rate significantly in the last year. Haven’t we learnt any lessons from the global financial crisis?

3.    Most businesses operate as a company, and the company tax rate is 30 percent. This means that you are only truly saving 15 percent (being 50 percent of 30 percent) on the ticketed price of an eligible asset purchase. Not 50 percent that some business people believe. It is only nine percent for large businesses as they are only getting a 30 percent bonus deduction. If my business needs an asset then I am going to look at second hand first because you are saving a lot more than 15 percent from the cost of a brand new asset. You can probably negotiate a discount of that size as well anyway!

4.   The industry that is heavily promoting the 50 percent tax break is the car industry.  God knows that this ailing industry needs a helping hand and the 50 percent deduction will definitely give them more customers in coming months. But remember that you need any car purchase registered in the same entity as your ABN.  For small businesses this is a company structure. And we know that when companies have cars owned by them and provided for the benefit of employees and their associates that Fringe Benefits Tax may apply. If the car is hardly used – that is, less than 15,000 kilometres travelled per year – then the FBT rate is 26 percent of the original cost of the car … every year as well before reducing by 1/3 in the fourth year and beyond that you have the car.  Yes the taxman giveth … but the taxman can taketh away too!

If your business desperately needs to buy an asset then by all means go out and take advantage of this great Tax Break.  But don’t go out of your way for a 50 percent tax deduction because it really isn’t as attractive as what you may think!

Is your business going to take advantage of the 50 percent Tax Break?

What do you think?

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Adrian Raftery

Adrian Raftery

Adrian Raftery has over 20 years experience with small businesses and individuals as an award winning Chartered Accountant & Certified Financial Planner. He is managing director of ARW Chartered Accountants and CEO of accountantsRus and is fast becoming one of Australia’s leading commentators on all matters relating to finance, tax and superannuation. This blog is designed to provide helpful advice to business owners about how to manage their finances and get their tax right.

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