When your business shouldn't bother with the 50% Bonus Deduction

Well the Federal Budget came out last week and most pundits labeled it as a pretty tame affair particularly with respect to businesses. I have to agree.

There was no change for large business and the only significant change for small business was the extension & increase of the Small Business Tax Break – from 30% to 50% bonus deduction to small businesses (ie turnover under $2M) for assets acquired between 13 December 2008 to 31 December 2009.

The media have been raving about how great this measure is for small business. 50% extra deduction. Sounds great doesn’t it? Well I am not that excited for quite a few reasons as outlined below:

1. To enjoy the bonus deduction your business has to outlay extra cash to buy the assets. With times being tough, cash is king. Don’t forget my A-B-C motto of money matters – Absolutely Bloomin’ Cash – a business with poor cashflow is going to struggle in the coming months and years. Why put pressure on your cashflow if you don’t need to? I am predicting alot of businesses will get their cashflow requirements wrong & get into strife, thus putting more pressure on the economy if businesses fail.

2. So let’s say that you want to preserve your cash. And that you want to finance the purchase instead. If you need to finance then you are merely putting more pressure on the business’ balance sheet and future cashflow commitments. And business finance is not cheap these days either despite the RBA reducing the benchmark interest rate significantly in the last year. Haven’t we learnt any lessons from the global financial crisis?

3. Most businesses operate as a company. And the company tax rate is 30%. This means that you are only truly saving 15% (being 50% of 30%) on the ticketed price of an eligible asset purchase. Not 50% that some business people believe. It is only 9% for large businesses as they are only getting a 30% bonus deduction. If my business needs an asset then I am going to look at second hand first because you are saving alot more than 15% from the cost of a brand new asset. You can probably negotiate a discount of that size as well anyway!

4. The industry that is heavily promoting the 50% tax break is the car industry. God knows that this ailing industry needs a helping hand & the 50% deduction will definitely give them more customers in coming months. But remember that you need any car purchase registered in the same entity as your ABN. For small businesses this is a company structure. And we know that when companies have cars owned by them and provided for the benefit of employees and their associates that Fringe Benefits Tax may apply. If the car is hardly used – that is, less than 15,000 kilometres travelled per year – then the FBT rate is 26% of the original cost of the car … every year as well before reducing by 1/3 in the fourth year and beyond that you have the car. Yes the taxman giveth … but the taxman can taketh away too!

By all means if your business desperately needs to buy an asset then by all means go out & take advantage of this great Tax Break. But don’t go out of your way for a 50% tax deduction because it really isn’t as attractive as what you may think!

Is your business going to take advantage of the 50% Tax Break?