The new temporary full expensing rules provide businesses with a turnover of up to $5 billion with an immediate deduction for 100 per cent of the cost of eligible depreciating assets.
The provisions are set out in new Subdiv 40-BB of the Income Tax (Transitional Provisions) Act 1997. Temporary full expensing was announced as part of the Federal Government’s 2020–21 Budget handed down on 6 October 2020 enacted by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020, which received Royal Assent on 14 October 2020.
A summary of the temporary full expensing rules
Which entities are eligible?
Entities which satisfy the definition of a small business entity (SBE) in s. 328-110 of the ITAA 1997 — including that they carry on a business — assuming that the annual aggregated turnover threshold of $10 million was instead $5 billion.
Entities with an annual aggregated turnover of $50 million or more are subject to some restrictions (see below).
The full deduction will automatically apply for an eligible taxpayer in respect of eligible expenditure. The taxpayer cannot make a choice or election to opt in or out of the concession.
When is the eligibility period?
A full deduction can be taken for eligible expenditure incurred from 7.30 pm AEDT on 6 October 2020 (‘the Budget time’) until 30 June 2022.
Which assets are eligible?
A depreciating asset qualifies for full expensing if, after the Budget time and on or before 30 June 2022, the entity:
- starts to hold the asset; and
- starts to use the asset, or have it installed ready for use, for a taxable purpose.
Further, no balancing adjustment can happen to the asset in the income year (for example, it is not sold in the year in which the full expensing is applied).
An asset is not eligible for full expensing if:
- the capital allowances rules in Div 40 of the ITAA 1997 do not apply to it (for example, if it is trading stock, a capital works asset or a CGT asset);
- the asset is not used or located in Australia for the principal purpose of carrying on a business;
- the expenditure is allocated to a low-value pool or a software development pool; or
- the expenditure is deductible to the entity or another entity under the primary production depreciation rules in Subdiv 40-F of the ITAA 1997. Note that SBE taxpayers which use the simplified depreciation rules in Subdiv 328-D can choose to depreciate primary production assets under either Subdiv 40-F or Subdiv 328-D — there are some differences between the regimes.
Limitations for entities with turnover of at least $50 million
Entities with aggregated turnover of $50 million or more cannot fully deduct the cost of an asset where the entity had made a commitment in relation to the asset prior to the Budget time — even if the entity did not start to hold, and to use or have it installed ready for use, until after that time.
These entities also cannot fully deduct the cost of a second-hand asset — including the cost of a licence relating to a second-hand asset.
For entities with aggregated turnover of less than $50 million, the full expensing is available for assets which are acquired either new or second-hand. The provisions include some specific rules relating to what constitutes a second-hand asset.
How much is the deduction?
The decline in value — the amount that can be fully expensed for the income year — depends on when the asset starts to be used or installed ready for use for a taxable purpose.
Where the asset starts to be used or installed ready for use for a taxable purpose in the same income year as it started to be held — the amount the entity can claim in that income year is the sum of:
- the cost of the asset (the first element of cost); and
- the amount paid during the income year to bring the asset to its present condition and location, such as the cost of improvements (the second element of cost).
Where the asset starts to be used or installed ready for use for a taxable purpose in a later year — i.e. it starts to be held during 2020–21 and used or installed ready for use during 2021–22 — the amount the entity can claim in 2021–22 is the sum of:
- the opening adjustable value of the asset for 2021–22; and
- any amount included in the second element of cost in 2021–22.
The full expensing of the second element of cost may apply to both post-Budget depreciating assets and existing depreciating assets that an entity holds between Budget time and 30 June 2022.
In calculating the amount to be fully expensed, any amount incurred after 30 June 2022 is disregarded.
Changes to the $150,000 instant asset write-off
The Act also amended the $150,000 instant asset write-off (the IAWO) — for business entities with an annual aggregated turnover of less than $500 million — to require that the asset:
- is first used or installed ready for use by 30 June 2021 — this has been extended from 31 December 2020; and
- is acquired by 31 December 2020 — this has not changed.
The cost of a car that is first used or installed ready for use during the 2020–21 income year may be deductible — up to the car depreciation limit ($59,136) — under either the IAWO or the full expensing measure. However, where both regimes apply, the full expensing takes priority.
Implications for simplified depreciation for SBEs
SBEs with an annual aggregated turnover of less than $10 million can choose to apply the simplified depreciation rules in Subdiv 328-D of the ITAA 1997.
Under the temporary full expensing rules, SBEs that apply the simplified depreciation rules will deduct:
- the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the Budget time and 30 June 2022;
- the second element of cost of these assets and of existing eligible depreciating assets incurred during this period; and
- the balance of their general small business pool.
Deferral of the recommencement of the lockout rules
The ‘lockout rules’ that prevent SBEs from accessing the simplified depreciation regime for five years after they opt out of that regime will continue to be suspended for the 2020–21 and 2021–22 income years.
Interaction with other concessions
The staged application of the various capital investment incentives and concessions, and the inconsistent eligibility criteria and timeframes across these regimes, means that there is an array of rules that might apply in relation to the acquisition of a particular asset.
Where an amount is immediately deductible in full under temporary full expensing and another regime, e.g. the IAWO, the temporary full expensing measure takes precedence.
The IAWO is generally more restrictive for the following reasons:
- a cost threshold of $150,000 — there is no upper cost limit for full expensing;
- the IAWO is only available to entities with an annual aggregated turnover of less than $500 million — the turnover threshold for full expensing is $5 billion;
- the asset must be first used or installed ready for use by 30 June 2021 — it is 30 June 2022 for full expensing; and
- the asset must be acquired by 31 December 2020 — it is 30 June 2022 for full expensing.
However, in some circumstances, an immediate deduction will be available under IAWO where it is not available under the full expensing rules:
- where an entity with turnover of between $50 million and $500 million acquires a second-hand asset; or
- where an entity acquired, or first used or installed ready for use, the asset on or after 12 March 2020 and prior to the Budget time.
From 1 July 2021, the IAWO threshold will revert to $1,000. Therefore for the 2021–22 income year, a business entity will only be able to immediately write-off the cost of a newly acquired asset > $1,000 if eligible under the full expensing rules.
In addition, the Backing Business Investment Incentive applies to eligible businesses with an aggregated turnover of less than $500 million in the 2019–20 and 2020–21 income years — that is, there is an overlap with the IAWO concessions. This incentive allows eligible businesses to claim depreciation on a new asset at an accelerated rate.
The temporary full expensing measure applies automatically — as do the IAWO and Backing Business Investment Incentive. The taxpayer cannot choose to depreciate the cost of an eligible asset over a number of years as though the full expensing rules did not exist.
A larger deduction is not always what a business entity wants. It is critical to keep in mind that a deduction is of less value if it merely creates a carry-forward loss.
For sole traders this can be particularly pertinent as a write-off can mean the loss of a tax-free threshold for a year, meaning that fully expensing an asset’s cost could actually leave them in a worse position over time.
As it is not possible to elect out of the concession and with the overlay of other capital investment concessions, tax planning is all the more important in 2020–21. The automatic application of the concession to low-value and small business pooling will also need to be factored into this planning.
Tax agents are facing enough complexity in their examination of fixed asset registers in the completion of 2019–20 tax returns — 2020–21 is on track to eclipse that. It does, however, provide practitioners with an opportunity to navigate clients through potentially significant tax savings through careful capital asset investment planning.
Further info and training*
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Temporary expensing of depreciable assets – simple, right?
Our Senior Tax Trainers Lee Ann Hayes and Michael Bode will explore the consequences of significant depreciation changes.
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*This section was revised on 19 July 2021 to reflect our latest training sessions.