On 25 February 2009 the Federal Treasurer released the Exposure Draft and Explanatory Memorandum to the Tax Laws Amendment (Small Business and General Business Tax Break) Bill 2009. This draft legislation gives shape and form to the Government’s announcement made on 3 February 2009 regarding the enhanced temporary investment allowance.

In addition to the Explanatory Memorandum the Federal Treasurer released a list of frequently asked questions that provides further guidance and explanation of the practical operation of the tax concession. Of particular interest is the explanation provided in relation to acquisition of second hand assets and assets acquired under lease arrangements.

As explained in the Moore Tax News released on 4 and 10 February, the investment allowance provides a bonus tax deduction of 30 per cent  and 10 per cent of the acquisition cost for eligible depreciating assets acquired between 13 December 2008 and 31 December 2009 and installed prior to 31 December 2010.

Second Hand Assets
The bonus deduction will only apply to acquisition expenditure on new assets or new expenditure on existing assets. As such, the Explanatory Memorandum provides clarification on what is considered ‘new’ for the purposes of claiming the bonus deduction.

An asset will be considered ‘new’ if it has never been used or installed ready for use by the taxpayer or another entity for any purpose (business or otherwise) prior to 12 December 2008. However, an asset will be considered ‘new’ if it has only been used for 'reasonable testing and trialling'.

This is particularly relevant for entities that acquire ex-demonstration motor vehicles (also note that the luxury car limit will apply to limit the bonus deduction) or large machinery where testing is required by the vendor prior to sale.

Assets acquired under lease
Assets acquired under lease are eligible for the bonus deduction. The bonus deduction will be available for taxpayers that are entitled to claim a depreciation deduction for leased assets under Subdivision 40B of the Income Tax Assessment Act 1936. The Explanatory Memorandum explains that it is a matter of commercial negotiation to determine how the additional deduction affects lease prices.

Passive Activities
It is the intention of the proposed law that taxpayers that are able claim depreciation deductions in relation to assets will also be eligible to claim the bonus deduction. This is regardless of whether the taxpayer is involved in active or passive income generating activities. However, the wording in the Exposure Draft may not necessarily achieve this result. As such if the law was to be introduced in its current form, taxpayers not carrying on a business that derive passive income (e.g. rental income) may not qualify for the bonus deduction. We highlight that this is one issue that Treasury will need to consider before the legislation is tabled as a Bill in Parliament.

To this end Treasury has invited interested parties to comment on the Exposure Draft legislation and Explanatory Memorandum. The closing date for these submissions is 10 March 2009.

For additional information regarding the bonus deduction please refer to our Moore Tax News article published on 4 February 2009 and Moore Stephens’ list of frequently asked questions published on 10 February 2009.

For further information on the Small Business and General Business tax break please contact your Moore Stephens relationship partner.