This is a bit of a specialised post. It will only be of interest to people who:
1: Are in Australia, and
2: Have an Australian Business Number, OR
3: Are an independent primary or secondary school student, or caring for one or more children who go to primary or secondary school, and meet some other requirements, and
4: Would like to buy new computer gear, or other business-related stuff. Computers only, for the "student" part of the deal.
Everybody else should skip this post. So should people with a short attention span, because I do go on a bit. If you stick with it, though, you could end up paying a substantial amount less tax.
Please note, however, that I Am Not An Accountant, and nothing in this post should be treated as accounting, legal, matrimonial or any other kind of advice. But this is what our accountant told us, and you'd better believe I'm going to take action based on it.
If you meet the above requirements, be advised that the Australian Government, as part of that economic-stimulus malarkey that's suddenly become so trendy, is itching to give you a refund on new equipment of all sorts for your business, and/or computers for the education of yourself or your kids.
The first deal is called the "Small Business and General Business Tax Break"; the second is called the Education Tax Refund. Each of them allows you to claim a significant amount of money back on eligible expenses.
The Small Business Et Cetera Tax Break is the big news, if you ask me. It gives you a bonus 50% tax deduction, if your business has a turnover of less than two million dollars a year and you pay at least $1000 for some deductible asset.
(If your business turns over more than two million a year, you get a bonus 30% deduction on expenses of $10,000 or more.)
Suppose you buy some tax-deductible business-related thing, like a computer, that costs $2000. Further suppose that you're paying 30% tax on the portion of your income you used to buy it.
Without the Tax Break, you'd deduct the $2000 from your taxable income over whatever period you usually do, and thus get a total $600 ($2000 times 30 per cent) tax refund by the time you've finished depreciating the computer's value to zero. (In most cases, as mentioned on that ATO page, this'll take either three or four years; you can depreciate a laptop computer by 33% per year, or a desktop computer by 25% per year.)
With the Tax Break, you get to deduct $3000 from your taxable income, giving you an extra $300 tax refund, for a total of $900.
To put it another way, 100%-deductible things are now 150%-deductible.
The Tax Break's 50% deduction also, to use gaming parlance, "stacks" with existing deductions. You still depreciate the computer's capital value to zero over a few years, and whatever other shenanigans you've got going with your accountant also still apply. Everything works as it did before, but you get an extra 50% deduction from your initial deductible purchase expenses.
(The only thing the Tax Break doesn't stack with are the previous versions of itself, which worked the same way but gave a lower deduction bonus.)
The Tax Break also applies to any business equipment purchase over the $1000 (for businesses with turnover below two million dollars) or $10,000 (for higher-turnover businesses) threshold.
("Substantially identical" items, or items forming a set, can be grouped together for price-threshold purposes. So if you buy $1200 worth of computer parts from various dealers and assemble them into a PC yourself, you ought to be able to apply the Tax Break to the total price.)
But you don't have to buy a computer to qualify for the Tax Break. Cars, cement mixers, cattle-prods, circus tents; pretty much any capital acquisition that qualified as a business deductible in the first place now gives you 1.5 times the previous deduction (or 1.3 times, if you're in the higher-turnover category).
Business-related computer hardware often seems, of course, to bear a strong resemblance to not-very-business-related computer hardware; a significant number of "educational" computers also seem to be equipped with unnecessarily powerful graphics cards. Where you draw the line is a matter for you, your accountant and your chosen confessor. If something's only half used for business purposes and so only 50% deductible, you can of course still apply the Tax Break to it, provided the deductible portion of the expense is over the $1000/$10,000 threshold.
The Education Tax Refund isn't as exciting, partly because of the requirement that the gear be purchased for the edification of some ungrateful student, but mainly because it only applies to computer equipment and related stuff, like computer repairs, Internet access and so on.
The Education Tax Refund is a straight cash-back deal, though, not a taxable-income-reduction one. You can claim back half of your eligible expenses, up to a ceiling of a $375 refund per primary-school student per year and a $750 refund per secondary-school student per year. You can also roll over expenses above the refund limit to the next year if you're still eligible then.
So if you've got one high-school student and you buy them a $2000 computer, you can claim a $750 refund on the first $1500 of its price the first year, and another $250 on the final $500 of its price the next year.
I did a bit of hunting for people criticising the Small Business and General Business Tax Break, to see if there are any pitfalls that've evaded me. The most negative analysis I could find was this post at Dynamic Business.
To answer it point by point:
1: The Tax Break is bad for cash flow. You may be getting a ton of money back, but you only get that money back as part of your tax refund; there's no discount on the actual purchase price of whatever you bought. And you only get the money back in instalments, over whatever period you're allowed to use to depreciate the goods; if something takes many years to depreciate to zero, the benefit per year may be trivial.
If you do your buying before the end of the 08-09 financial year, of course, you shouldn't be waiting very long for at least the first instalment of your refund.
2: If you don't actually have enough cash on hand to buy whatever refund-eligible thing you want to get, you can end up losing money if you borrow in order to buy.
You could still actually end up ahead if you buy a new computer for your small business on your credit card before the end of this financial year, and use the first chunk of the refund to help you pay it off. But if you buy shortly after the start of the next financial year, you will of course not get your first refund-chunk as quickly.
So, you know, don't do that.
3: Some people miscalculate what an additional 50% deduction is worth to them. As the Dynamic Business blogger points out, if you're only paying 30% company tax on your income anyway (or you're not making a huge amount more than the average wage; at the moment the Australian $34,001-to-$80,000 tax bracket is 30%), an additional 50% deductible only adds up to another 15% off the real price of the item. That's nice to have, but not mind-blowing, especially when you have to wait a few years to get it all.
So, uh, yeah - 50% higher deductible doesn't mean you get half of the purchase price back. Sorry about that.
(But the Education Refund does work that way, up to its ceiling.)
4: The Australian car industry really wants the Tax Break to persuade you to buy a vehicle. Or several vehicles. Also, you have to make sure the car is registered to the entity claiming the deduction, blah blah blah, Fringe Benefits Tax, blah.
Don't buy even one new car, if you don't need a new car.
Aaand... that's pretty much it for the Tax Break's down-side.
The Education Tax Refund has, as I mentioned above, other restrictions and ceiling deduction amounts. The only further "catch" I can see for it, though, is that the Education Refund doesn't "stack" with other deductions. If the computer you're buying for your kid is also the computer you're buying for your home office and thus tax-deducting, you can't claim the Education Refund on it to whatever extent you've claimed some other deduction or refund on it. (So if it's a $2000 computer, and you're claiming it as 50% for your home office and thus deducting $1000 from your taxable income, you can only claim a maximum of $500 Education Refund on it. But if you've got an ABN, you could apply the Small Business Tax Break to the business deduction!)
The Education Refund will be similarly reduced or eliminated by any other tax offsets, reimbursements, payments, kickbacks, hush money, or cash flung at you by a weeping tax officer you've just forced at gunpoint to dig a shallow grave out in the bush.
Is it worth it?
If you're wondering when you should buy computer equipment, the answer is almost always "later".
Wait as long as possible before buying new IT gear, if your old gear isn't actively impeding your ability to do business. Everything gets cheaper and faster with each passing week. And the current incarnation of the Small Business Tax Break will keep running for any purchases made before the end of the 2009, so you don't have to leap into action and buy new stuff right now. Unless, of course, you'd like to reduce this year's taxable income, as well as next year's.
The Education Refund offers, in return for its more annoying conditions, better value within its limits. If a new computer was going to be completely non-deductible in any way at all, as is usually the case for ordinary consumers, and if you meet the criteria for the Education Refund and have enough kids of the appropriate age to cover the cost, you really could get that computer for half price.
If you've been seriously considering getting new gear anyway, the Small Business Tax Break's 50% bonus deduction is quite substantial, too. The government isn't giving you the extra refund at the time of purchase, but they really are giving you - OK, to be completely accurate they're giving you back - that much money.
(The size of the bonus deduction depends, of course, on what tax rate you're paying on that part of your income. As I mentioned above, Australian individual tax brackets currently top out at 45%; company tax, which may well apply to people claiming the Tax Break, is a flat 30%.)
Computer shops all over Australia, including m'verygoodfriends at Aus PC Market, have been seeing a drop in sales in recent months. Australia's economy seems to be in decent shape and doesn't look likely to follow the USA down the plughole, but people have still been putting off buying new stuff until they're sure they won't have pawned it and moved into a cardboard box under an overpass by this time next year.
If you've achieved that small level of personal financial confidence then I, in my capacity as a person entirely unqualified to give taxation advice, strongly recommend you accept the Government's gift.
I certainly will.
(Once again: I'm not an accountant. Please don't sue me if there's anything wrong with the above. Do please talk about this in the comments, but contact your own accountant if you need authoritative answers. There's also a "Business Tax Break Infoline" at 1300 337 921.)
Wayne Maber of Maber Business Services is our accountant, and helped me to understand all this.