The Government’s temporary Investment Allowance, announced in December, is a positive move for the asset finance industry and the broader economy. The ten percent investment allowance, in the form of an additional tax deduction, effectively provides the owner of new assets purchased with an upfront additional tax deduction of ten percent of the asset cost in addition to the capital allowance (depreciation).
The Investment Allowance is available now until 30 June 2009 for assets costing $10,000 or more and in place by 30 June 2010. While the limited timeframe for the Investment Allowance is considerably shorter than the previous Government-announced Investment Allowance initiative in 1993, when the Investment Allowance was available for around two years, the Government is clearly confident in the uptake of the Investment Allowance and for a significant spend within a relatively short timeframe, with an allocated $1.6 billion over the forward estimates period.
Industries with regular fleet sales and larger equipment requirements, such as transport and mining groups, will particularly find it beneficial as these companies are more likely to have ongoing business requiring them to invest in equipment, regardless of the Government announcement. Government (State and Federal) spending-related industries, and those companies fulfilling Government contracts, will also feel the benefit due to the current growth phase in these areas.
However the Investment Allowance is also good news for small and medium-sized businesses that have been considering the purchase of additional or replacement equipment. Other industries that can benefit include: infrastructure, construction (residential, commercial and industrial), agribusiness, utilities (such as power, water and gas), and telecommunications.
“Business investment is a big decision. As a business, as long as the business owner is confident about future demand for its goods or services, now is a good time to lock in investment plans and purchase new equipment or update existing equipment,” says Andrew Watson, General Manager Asset Finance at the Commonwealth Bank.
New equipment purchases will enable business owners to concentrate on growth and taking their business to the next level, while upgrading equipment significantly lifts productivity and long term profitability.
“Investment Allowances have proven to be an extremely tax-effective means of lifting and bringing forward investment spending across the Australian economy. Higher investment lifts growth, productivity and profitability, providing long term benefits to Australia’s economic and social infrastructure,” says Michael Workman, Senior Economist at the Commonwealth Bank.
In addition, the cost of equipment is expected to drop given lower demand over the past year and a resulting surplus of stock.
The 1993 Investment Allowance came at a time when Australia was recovering from recession and was an attempt to boost capital investment and assist the recovery, and the Government’s latest move is also aimed at lifting economic activity and supporting jobs.
Currency is also presently a consideration for businesses and will play a role in the decision to invest in equipment. A depending factor will be whether the business purchases equipment by accessing a manufacturer offshore or an Australian-based distributor or manufacturer.
“Customers are borrowing over three and five-year terms. The Swap rates are attractive at the moment for borrowers and are still falling, so the ten per cent provides another benefit,” says Workman.
The lower Australian dollar also presents businesses who export with an advantage, for example Australian producers with export markets.
Indeed, it’s been a big year for the agriculture industry with farmers in some parts of the country experiencing a strong year for crops after several years of drought. For these businesses, now is the time to consider replacing equipment.
While the Government is still to put the temporary Investment Allowance initiative into legislation and provide some clarity around the specific details, the Investment Allowance is available now and the ten percent does represent a significant tax benefit for businesses.
