The Small Business Tax Break is a temporary measure, and was introduced as part of the Government’s multi billion Nation Building and Jobs Plan to stimulate the Australian economy in response to the Global Financial Crisis. The Tax Break was initially announced as a 10% investment allowance in December 2008, and was subsequently extended via the May 2009 Federal Budget.

The rules relating to the Tax Break are contained in Division 41 of the ITAA 1997 which was enacted by Tax Laws Amendment (Small Business and General Business Tax Break) Act 2009.

Broadly, the Tax Break provides an additional tax deduction for businesses that invest in eligible assets (or incur certain expenditure to improve existing eligible assets) between 13 December 2008 and 31 December 2009, and the asset is first used (or installed ready for use) by 31 December 2010, provided certain other conditions are met. Most importantly, the Tax Break is not refundable and does not result in a cash refund, but rather reduces a taxpayer’s assessable income for a particular income year. To the extent that the taxpayer has a tax loss for the income year in which the Tax Break is claimed, the bonus deduction will form part of that loss (this can be contrasted to the way the former Investment Allowance operated).

There are some important stringent criteria which must by complied with to obtain The Tax Break, which is limited to “new” tangible depreciating assets which the taxpayer uses principally in Australia for business purposes and which meet a minimum expenditure threshold. Therefore, the Tax Break is not available for acquisitions of second-hand assets. The rate at which the deduction applies is 50% for Small Business Entities (‘SBEs’) and either 10% or 30% for other businesses depending on when the investment is made and when the asset is first used or installed for use, as detailed in the table below. The bonus deduction is claimed in the income year that the asset is first used or installed ready for use. So, for most eligible businesses with a 30 June year-end, the Tax Break can only be claimed as a tax deduction for the income years ended 30 June 2009, 2010 or 2011.

The following table sets out the key dates for determining the rate at which the Tax Break applies, and the income year for which the deduction is claimed by an eligible taxpayer.

In the Company Tax return we shall claim this item under Label G Small business and general business tax breakunder Item 7 – Reconciliation to taxable income or loss