There are only 14 shopping days until the end of the financial year.
Should you buy a new computer or upgrade your existing one, or its software?
To maximise your tax advantage it is a good time to upgrade _ just before the financial year. This is particularly true this year because the investment allowance cuts out at the end of this financial year.
That is the swing. What about the roundabout? Well, everyone is upgrading or buying now. So it is a sellers’ market and there are fewer crazy deals around. In Canberra it is worse. All those Government Departments are looking for ways to off-load any spare cash at the end of the financial year lest the Department of Finance takes it off them or gives them less next year. What better way to waste the taxpayers’ money than buying a whole lot of computer junk?
True, Finance has enabled some carry-overs to stop this nonsense, but it hasn’t eliminated it and the mentality is still there.
First to some basic tax rules.
(BOLD) The investment allowance: (UNBOLD) It is only claimable if the amount invested is greater than $3000 and all for incoming-producing purposes. The allowance comes to 10 per cent, which for a $3000 spending comes to a $300 deduction or about $150 cash back for those on the highest marginal rate (which is virtually everybody not living on bread and dripping these days).
You can put a package of hardware, peripherals (modems, printers, speakers etc) and software to attain the $3000 limit. Then you get the allowance this financial year.
Further, when you depreciate, you depreciate from the purchase price (not the purchase price less the allowance).
(BOLD) Depreciation: (UNBOLD) If you are not eligible for the investment allowance because the computer is under $3000 or you use some of it for private purposes, you can still get some tax relief in the form of depreciation.
Generally, when you buy a package of hardware, software and peripherals it is treated as one item of plant for depreciation purposes, and you can usually depreciate it over four or five years.
There are two methods allowed: prime cost and diminishing value. Diminishing value gives the better result in first year and probably reflects reality better. You depreciate at 40 per cent a year until nothing is left. So a $3000 package gives you a deduction of $1200 in Year 1 (leaving the package valued at $1800). In Year 2 you get a deduction of 40 per cent of the $1800, leaving the packaged valued at $720 and so on until there is nothing left (Pure Mathematicians into infinity theory can round off the last cent before they reach the Year Dot).
If you sell the machine for more than the depreciated value the balance is treated as income; if less you can deduct the balance.
With the prime cost method you deduct at 27 per cent of the original value each year until it is gone.
With each method you are only allowed a pro-rata deduction if you buy the machine part-way through the financial year. That means a very small deduction for the remaining days of this financial year.
BOLD Other tips: (UNBOLD) Separately purchased software (whatever the price), separately purchased peripherals priced under $300 and repairs of any kind are fully deductible in one year, even if the purchase or repair was paid for as late as June 30. These deductions have to be apportioned if the computer equipment is used partly for personal use.
In some circumstances computer gear is fully deductible in the year of purchase. If the economic life of the computer is less than three years, you can deduct the whole lot in the year of purchase, even if it was bought on June 29. However, the onus is on the taxpayer to show it was reasonable to claim the economic life was less than three years. Computer sales people would be a good example. So, too, people with a history of turning over their computer every couple of years. But general users would be hard pressed.
The investment allowance is not available for those who can deduct the whole price in one year.
So here is a checklist to answer before buying:
1. Is it totally for income-producing?
2. Does the package of hardware, software and peripherals come to more than $3000?
3. Can I show that the economic life of the computer for me is less than three years?
If yes to all of those, you have to weigh up whether it is worth forsaking the investment allowance to get your deduction in one year. This late in the financial year, the answer is clearly yes. The investment allowance gives you approximately 5 per cent of the value of the computer cash in your hand. Getting the deduction in one year (especially this late) is worth more than that in interest. Besides, you don’t want to leave your money with the government, they will only waste it.
If No to either 1 or 2 and No 3, then you have to weigh up whether to buy a package of hardware, software and peripherals, or to buy them at different times and different places. If you buy a package you usually get the software and peripherals cheaper, but the software and peripherals over $300 have to be depreciated over several years (and pro-rata this years means virtually nothing). If you buy your software separately it is immediately deductible and so are peripherals under $300.
As a general principle when you buy software with a new computer, the discount would usually far outweigh the advantage of the early deduction.
The reason software is heavily reduced when you buy a new computer is all about competition and market share. The major software producers are like the Jesuits. They want to get you young and keep you for life.
Microsoft, Lotus and Novell-WordPerfect well know that it is easier to get a new user than convert a competitors’ user. Once ensnared people will regularly upgrade, which keeps the companies’ income rolling in.
A word of warning: the Tax Office would take a very dim view of taxpayers artificially splitting their computer package so some bits fall under $300. If the bits are to be used as one, they are treated as one and depreciated over three years not deducted in one. I doubt, for example, if the initial operating system software of a computer could ever be separately deductible, though later upgrades can.
Information was obtained from an independent adviser and the Tax Office for this article. But it cannot hope to cover every circumstance. The article is to provoke thought, not action. Before acting, readers should get advice from the tax office or an independent adviser.