From the desk of Christopher Emmanuel,

Last February, the government announce one of the most lucrative incentives for almost every business in Australia called Small Business and General Business Tax Break. Originally, they proposed that small business and general business can get a once off extra deduction of 30% of new eligible investments purchased between 13 December 2008 until 30 June 2009 but then subsequently, they increase the benefit for Small Business (aggregate turnover < 2millions) to 50% extra deduction of new eligible investments between 13 December 2008 to 31 December 2009.

We are now approaching end of December 2009 fast and I am sure that until now not many people understand the concept of this incentives. The worst part is many actually miss-interpret this scheme.

Many believe that they will get the money back from the government in some way. This is not true. The Small Business and General Business Tax Break is nothing to do with discount or cash back to your pocket. Now, to even make things even worse, many accountants and bookkeepers do not understand the way the scheme works. They thought they need to put in a journal for the extra deductions. This is a wrong understanding as well.

This scheme is only a notional deduction in the tax return and will not be reflected in the books. The purpose of this incentive is to allow taxpayer to reduce their tax liability.

Example:

John, a Small Business Entity, purchased a new equipment for his business on 1 January 2009. It costs him $4,400 (inc GST). Depreciation calculated at 20%.

John’s Ledger at 30 June 2009 will show:

• Plant & Equipment: Dr 4,000
• Accumulated Plant & Equipment: Cr 800
• Depreciation: Dr 800

John’s Tax Return at 30 June 2009 will show:

• Depreciation Expense: 800
• Small Business and General Business Tax Break: 2,000

Now let just say that John’s business profit before depreciation and tax of $10,000 and his marginal tax is 45% ignoring Medicare Levy. Here are the difference:

Scenario 1 – Without Small Business and General Business Tax Break:

Book/Tax Return:

Profit Before Depreciation and Tax: $10,000

Depreciation: 800

Profit before tax: 9,200

Tax: 4,140

Scenario 2 – With Small Business and General Business Tax Break:

Book:

Profit before depreciation and tax: 10,000

Depreciation: 800

Profit before tax: 9,200

Tax Return:

Profit before depreciation, SBGBTB, and tax: 10,000

Depreciation: 800

SBGBTB: 2,000

Profit before tax: 7,200

Tax: 3,240

Difference in tax paid: 900

So this is the purpose of Small Business and General Business Tax Break. It is to help businesses in Australia by reducing their taxes but they have to make the investment in new eligible investments assets. In a way the government help many businesses reduce their tax paid while boosting the economy of the nations. Smart heh?

To find out more about the Small Business and General Business Tax Break, click here.

If you would like to understand more or have queries about this investments allowance, do not hesitate to contact us. We are at Cashflow+Networks thrive to give our clients the best resources and information.

Regards,

Christopher Emmanuel

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