The investment allowance or business tax break is the best thing going at the moment for a tax deduction in Australia. If your turnover is $2million or less, you can obtain an extra 50% tax deduction for the purchase of assets to which the concession applies. There is a lesser concession for businesses with turnover above $2million. But when it comes to real property ( land and buildings) there are some issues that people constructing or improving properties should understand so that they can get the tax treatment of the acquisitions correct. Also, with some planning, you may be able to obtain the extra deduction from the investment allowance where there is some doubt as to whether it is available.
Here are the issues that you need to understand.
For an asset to qualify for the extra tax deduction, it must be a tangible depreciating asset. Broadly, tangible means that you can see and touch it. However, an item that is specifically excluded from the definition is land.
For something to be a depreciating asset, it must have a limited effective life. Further, the asset must be reasonably expected to decline in value over its effective life. The term “effective life” refers to an estimate of the life of the asset being used for income producing purposes.
Nevertheless, improvements to the land or a fixture to the land are deemed to be separate assets from the land. So this could refer to something that is added to a building structure. A fixture refers to something that is a fixed to the land or building and sometimes can include things that are resting on the land or building under their own weight.
If an improvement is made to land it can qualify for the capital works deductions and be eligible for a depreciation rate of 2.5% per year. If the works qualify for this deduction, it cannot qualify for the investment allowance. The assets that are permitted to have the 2.5% per year depreciation rate are, broadly, structural improvements to the land.
So with the reintroduction of the investment allowance, and due to the significant tax deduction that can be obtained if the investment allowance can be applied to a certain type of expenditure, an age-old tax issue in relation to depreciation will need to be considered. This is the question of whether a particular asset is part of the setting in which the income is produced or is a distinct asset or piece of equipment that merely has its location in the setting in which the income is produced.
For example, if you purchase a photocopier, this will not be considered to be part of the setting in which the income is produced. It is a stand-alone unit. However, a special alcove that has been built in order to house the photocopier would be considered to be part of the setting in which the income is produced. This example is fairly clear as to the outcome. However, there are many situations where it is not so clear and you may need to refer to tax cases that have been decided some years back to be able to determine, or least have some idea, of whether your asset will be able to attract the investment allowance.
You can, of course, ask for a ruling from the Tax Office but there are a number of issues that you need to consider if you are going to do this. One of those issues is the speed with which you need to know the information. You may not be prepared to invest in a particular structural improvement without understanding the tax implications of the assets that will be included in that improvement process. The response from the ATO may not be timely enough for your decision.
This issue will be of particular concern to property developers and people who are in the course of constructing buildings or extensions to buildings in the current period. It is quite possible that the building design and instigation of the project occurred well before the investment allowance was originally announced in December 2008. Accordingly, in the design phase, not much thought may have been given to the question of whether items in the design could be characterised as plant or equipment and therefore attract the investment allowance. Now, there is a strong financial incentive to look at this question closely.
When you make your decisions concerning the ability of assets included in the building to attract the concession, you will need to maintain proof and the reasoning as to why assets on the borderline were treated as attracting the tax break. You may need to enlist the services of a quantity surveyor in this process and a taxation advisor familiar with the cases I referred to above.
A further issue is the need to have assets installed ready to use by either 30 June 2010 or 31 December 2010, depending on which aspect of the concession you seek (or are able) to take advantage of. As we know, building projects can sometimes run off the rails and be delayed. No doubt there will be pressure on managers of building projects to have certain assets installed by the applicable dates. Some priority may need to be given to commissioning these assets even if the building project has not yet been completed.