Small business car tax write-off


Budget Review 2011-12 Index

Budget 2011–12: Small business car tax write-off

Michael Priestley

Small businesses will be eligible for an immediate tax write-off of up to $5000 on new motor vehicles purchased from 1 July 2012.[1] The remainder of the vehicle value will be pooled, along with other small business assets, which can be depreciated at 15 per cent in the first year and then 30 per cent thereafter. Under the existing depreciation rules for small business, motor vehicles are treated like other business assets in the pool and depreciated at 30 per cent (15 per cent in the first year).[2] The measure thus reduces the amount in the pool.

The measure provides a tax benefit. Taking the example of a new vehicle which is purchased for $33 960 in 2012–13, the net tax benefit is $1275 in 2013–14.  This net benefit is the amount over and above what a small business would be entitled to under the existing depreciation rules, and takes account of the flat $5000 write-off, plus 15 per cent depreciation for the remainder of the motor vehicle value ($28 960).[3] According to the Budget forward estimates, the cost of the new tax write-off will be $350 million over two years.

Small business depreciation—accelerated initial deduction for motor vehicles

Revenue ($m)

 

2010‑11

2011‑12

2012‑13

2013‑14

2014‑15

Australian Taxation Office

‑200.0

‑150.0

Entrepreneurs’ tax offset

The tax write-off effectively replaces the entrepreneurs’ tax offset (ETO) which was introduced in 2005 by the former coalition government to help small businesses become established. The ETO targeted independent contractors, very small businesses or micro businesses and self-employed people starting up a small business. Typically, start-up costs of these businesses are self-funded and the ETO provided a tax offset of 25 per cent of the income tax liability.

The ETO applied to small businesses with an annual turnover of $50 000 or less and the maximum tax refund available was $2750. The offset phased out for annual turnover between $50 001 and $75 000. In 2009, the offset was subject to a means test and ceased for single persons with incomes over $70 000 and families with incomes over $120 000. Any unused tax offset could not be refunded or deferred for future years. 

From an estimated 2.7 million small businesses in Australia, a total of 397 785 businesses claimed the ETO in 2007–08 and 402 485 businesses in 2008–09, accounting for $177 million in deductions.[4]

According to the Treasury’s 2010 Tax Expenditures Statement, the cost of the ETO over the forward estimates (2012–13 to 2013–14) exceeded $350 million.  

Cost of the entrepreneurs’ tax offset ($m)

Cost of the entrepreneurs’ tax offset ($m)

Source: Treasury, Tax expenditures statement 2010, Commonwealth of Australia, Canberra, 2011, p. 89, viewed 19 May 2011, http://www.treasury.gov.au/documents/1950/PDF/2010_TES_consolidated.pdf

The abolition of the ETO will lead to savings of $180 million in 2013–14 and $185 million in 2014–15.

Assistance to the car industry

The Budget makes provision for a $300 million special appropriation in each of the budget and forward years under the Automotive Transformation Scheme Act 2009, and annual appropriations over the same period of $649 million ($212 million in 2011–12).[5]  The Automotive Transformation Scheme is the centrepiece of the Government’s assistance package to the car industry. It is a cash payment scheme established by the Automotive Transformation Scheme Act 2009. Taking the car tax write-off, special appropriations and annual appropriations together, budgetary assistance to the car industry over the forward estimates will total almost $1.69 billion.

Conclusions

Expert opinion on the abolition of the ETO and its replacement with the car tax write-off is divided, with some commentators citing the abolition of the ETO as a disincentive for business growth and others suggesting that the $5000 motor vehicle deduction sends the wrong signal to small business owners starting out in business.[6] Although the majority of small businesses (85 per cent) did not qualify for the ETO tax offset, those businesses which were eligible for the tax offset found it supportive. Other tax experts noted that the write-off of the first $5000 of any new motor vehicle purchase should be viewed in tandem with other initiatives announced in response to the Henry Tax Review which include a reduction in the company tax rate to 29 per cent in 2013–14 and immediate write-off of all business assets valued at under $5000 from 1 July 2012.[7]

The car tax write-off is a stimulatory measure that will lead to increased motor vehicle sales. The measure is also budget-neutral as the savings from terminating the tax offset cover the estimated $350 million cost of the car tax write-off. A technical argument can be made in favour of early-stage assistance to self-funded business operators as against applying a tax concession to a broader group of taxpayers who were eligible for the small business tax break announced in the 2009–10 Budget.[8] The car tax write-off underlies the ongoing assistance to the car industry at a time of falling car exports, and motor vehicle production at 1962 levels. [9]



[1].       The budget figures in this brief have been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no. 2: 2011–12, Commonwealth of Australia, Canberra, 2011, pp. 13, 42, viewed 17 May 2011, http://www.aph.gov.au/budget/2011-12/content/download/bp2.pdf

[2].       Under the tax law (section 328–110 of the Income Tax Assessment Act 1997), a small business entity is generally a taxpayer who is carrying on a business and has an annual turnover of less than $2 million.

[3].       Supporting Australian small business, Media Release, Joint media release, 8 May 2011, viewed 11 May 2011, http://minister.innovation.gov.au/Sherry/MediaReleases/Pages/
SUPPORTINGAUSTRALIANSMALLBUSINESS.aspx

[4].       Australian Taxation Office, ‘Part D: tax offset items’, Taxation statistics 2007–08, Table 14: personal tax, ATO, 2010, viewed 17 May 2011, http://www.ato.gov.au/content/downloads/cor00225078_2008PER14D.pdf; Australian Taxation Office, ‘Part D: tax offset items’, Taxation statistics 2008–09, Table 21: personal tax, ATO, 2011, viewed 17 May 2011, http://www.ato.gov.au/content/downloads/cor00268761_2009PER21D.pdf

[5].       Australian Government, Portfolio budget statements 2011-12: budget related paper no. 1.14: Innovation, Industry, Science and Research Portfolio, Commonwealth of Australia, Canberra, 2011, pp. 30–31, viewed 19 May 2011, http://www.innovation.gov.au/AboutUs/FinancialInformationandLegislation
/BudgetInformation/Documents/PortfolioBudgetStatementsDIISR2011-12.pdf
 

[6].       B.B. Whitehouse Group, ‘Government to replace entrepreneurs tax offset with $5,000 car tax break’, B.B.Whitehouse Group blog, 9 May 2011, viewed 16 May 2011, http://bbwgroup.com.au/blog/?entry=entry110509-142809

[7].       Ibid.

[8].       Small businesses were able to claim a bonus tax deduction of up to 50 per cent (up from 30 per cent) on the cost of new motor vehicles purchased between 13 December 2008 and 31 December 2009. The recovery in motor vehicle sales following the global financial crisis was attributable to increased business sales due to the small business tax break. See: Federal Chamber of Automotive Industries, Tax break spurs exceptional new car sales results, media release, Federal Chamber of Automotive Industries, 3 December 2009, viewed 16 May 2011, http://www.fcai.com.au/news/2009/12/231/tax-break-spurs-exceptional-new-car-sales-result

[9].       Australian Automotive Intelligence, Yearbook 2011, Tables: Vehicle Production, Automotive exports and imports, April 2011, pp. 66–71.


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