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Financing issues with 50 per cent tax break

Joe Kaleb
10 December 2009

This article focuses on the issues that arise with claiming the tax break on assets acquired from 1 July 2009 to 31 December 2009 under a finance arrangement with particular emphasis on cars.

Businesses have until 31 December 2009 to enter into a contract (referred to as the “investment commitment time”) to purchase a “new” asset in order to claim a deduction for the tax break and the asset must be installed by 31 December 2010.

A small business (that is, where the turnover is less than $2 million) is entitled to claim a 50 per cent tax deduction for new assets costing $1,000 or more, and larger businesses can claim a 10 per cent deduction for assets costing $10,000 or more. Turnover needs to be aggregated and includes the turnover of connected and associated entities of the taxpayer.

Note that the entity must be conducting a business and the asset must be acquired “principally” for use in the business in order to claim the tax break. This means that taxpayers who own rental properties and other passive investments are unlikely to qualify.

The method of financing the asset is important in relation to the contract date or “investment commitment time”, particularly as the 31 December 2009 cut-off date is approaching.

To claim the tax break, the business taxpayer must be the “holder” of the asset, which in most cases is the legal owner of the asset. This means that the asset will either need to be purchased outright, or financed under a loan, hire purchase agreement or chattel mortgage. Under a finance lease, the finance company is the “holder” of the asset unless the asset purchased is a luxury car (that is, costing more than $57,180 GST exclusive) where the taxpayer is deemed to be the holder of the asset.

On this basis, leasing of assets should be avoided as the taxpayer is not entitled to claim the tax break, unless a luxury car is acquired, in which case the finance method adopted is not relevant. The maximum deduction that a small business can claim for a car is limited to $28,590 ($57,180 x 50 per cent).

Where an asset is financed under a hire purchase agreement, the investment commitment time is the date of signing the finance agreement and not the date of signing the purchase contract. Therefore business taxpayers need to ensure that any assets (particularly cars) are ordered well in advance of 31 December 2009 so that the hire purchase agreement can be signed by this date.

Under a chattel mortgage, the taxpayer borrows all or part of the purchase price and the financier usually takes a charge solely over the asset.  In this situation, the relevant contract or investment commitment time is the date when the taxpayer places an order for the asset with the supplier. Accordingly, this form of financing should be used where an order is placed by 31 December 2009, but delivery of the asset will likely occur after this date.

Novated leasing is a popular method for salary packaging the provision of cars to employees as the employee is liable for the full cost of the car in the event of cessation of employment.  However for both luxury and non-luxury cars, the holder of the asset is not the employer. This means that the tax break is lost.

For the employer to be entitled to claim the tax break, the car would need to be financed directly by the employer under a loan, hire purchase agreement, or a chattel mortgage.

Where the employee is an owner of the business, this arrangement would be acceptable, but for external employees, the commercial risk to the employer makes it less attractive.

Subject to the above conditions, where an employer provides cars to family members as a fringe benefit, the car is taken to be used 100 per cent for business purposes (as a cost of remuneration) even though the person may solely or mostly use the car for private purposes. This provides small businesses with an opportunity to purchase multiple “new cars” and claim the 50 per cent tax break on each car resulting in substantial tax savings.  

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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