With most tax professionals now returning to work after the holiday break, this is the ideal time to do a stocktake of the status of recent tax, superannuation and related Bills which may affect tax practitioners and their clients in 2021. This article...
Temporary full expensing opt-out Bill has passed Parliament
On 10 December 2020, the Treasury Laws Amendment (2020 Measures No. 6) Bill 2020 (the Bill) passed both Houses of Parliament. It now awaits Royal Assent. The Bill makes changes to the temporary full expensing and Backing Business Investment (BBI) measures by:
- permitting entities to opt out of temporary full expensing and the BBI incentive on an asset-by-asset basis;
- introducing an alternative eligibility test for the temporary full expensing measure to extend the incentive to businesses which would otherwise fail the turnover test; and
- introducing a new balancing adjustment event where a written off asset is not used for the principal purpose of carrying on a business.
The temporary full expensing rules allow businesses with a turnover of up to $5 billion an immediate deduction for eligible expenditure on depreciating assets incurred from 7.30 pm AEDT on 6 October 2020 (the Budget time) until 30 June 2022. The provisions are set out in new Subdiv 40-BB of the Income Tax (Transitional Provisions) Bill 1997 (the IT(TP) Act).
The BBI measure allows businesses with turnovers of up to $500 million to accelerate the decline in value of eligible new assets between 12 March 2020 and 30 June 2021. The provisions are in new Subdiv 40-BA of the IT(TP) Act.
Opting out of temporary full expensing and BBI
Before the legislative amendments, the temporary full expensing and BBI measures applied to all eligible assets of an eligible entity. Entities are now allowed to make an irrevocable choice to opt out of temporary full expensing and the BBI incentive on an asset-by-asset basis.
Accordingly, an entity can choose not to apply these regimes to calculate the decline in value for a particular eligible asset, while continuing to use those rules for other assets, but it cannot revoke that choice once it is made.
The effect of making the choice
If the entity opts out either regime for an asset it may then apply the general capital allowances rules for that asset.
In the case of temporary full expensing, the entity makes the choice for a particular depreciating asset for each of the 2020–21 and 2021–22 income years.
In the case of the BBI incentive, the entity makes the choice for a particular asset for an income year and subsequent income years. As a result, the BBI rules automatically cease to apply to that asset in the next income year (without the need to opt out for that later income year) as the choice is irrevocable.
How does the choice apply to SBEs?
It is critical to note that if a small business entity (SBE) depreciates assets under the SBE capital allowances rules in Subdiv 328-D of the ITAA 1997, the new choice to opt out of temporary full expensing is not available.
The temporary full expensing provisions only apply to entities which use the ‘normal’ depreciation rules in Div 40 of the ITAA 1997. However the legislation which introduced Subdiv 40-BB also removed the $150,000 cap for the instant asset write-off (IAWO) for SBEs in s. 328-180 of the ITAA 1997. This effectively allowed SBEs which use Subdiv 328-D to also immediately write-off the cost of assets with no cost limit albeit under the IAWO provisions and not under Subdiv 40-BB.
* There are some differences between the IAWO and temporary full expensing which are not covered in this article.
The new choice to opt out of temporary full expensing (i.e. in Subdiv 40-BB) does not extend to the uncapped IAWO in s. 328-180. SBEs using Subdiv 328-D must continue to fully deduct the cost of all eligible assets under s. 328-180.
Therefore SBEs can only opt out of full expensing where they have opted out of Subdiv 328-D and depreciate under Div 40 for the income year.
Critical point: Pooled assets remain in the pool and, as per s. 328-220 of the ITAA 1997, the taxpayer must continue to use Subdiv 328-D to calculate depreciation deductions for these pooled assets.
Find out more about how the temporary full expensing and IAWO rules apply to SBEs, including the implications for the year end balance of the low value pool, in Capital Allowances Revisited.
Making the choice
The choice to opt out of temporary full expensing and/or the BBI incentive must be made in the approved form and given to the Commissioner by the day the entity lodges its tax return for the relevant income year. The Commissioner may determine the manner in which the choice is to be made and this may for example be by way of a disclosure in the income tax return or the capital allowances schedules. The ATO is yet to advise on how the choice is to be made.
Extending the availability of full expensing
The Bill also allows more entities to be eligible for full expensing.
The $5 billion aggregated turnover eligibility test includes the turnovers of entities connected with the taxpayer and of the taxpayer’s affiliates.
Therefore some entities — for example, the Australian operations of multinational groups — were precluded from accessing full expensing even if their turnover as an independent business entity was less than $5 billion.
The legislative changes retain the original eligibility test and introduce an alternative test. The company only needs to satisfy one of the tests (in practice, if it satisfies the original test it will also satisfy the alternative test).
The new alternative test
An entity satisfies the alternative test for an income year if:
- the entity is a corporate tax entity at any time in the income year;
- the entity’s total ordinary and statutory income other than non-assessable non-exempt income is less than $5 billion for either the 2018–19 or the 2019–20 income year (including entities with substituted accounting periods in lieu of 30 June 2020 but only those with income years ending on or before 6 October 2020); and
- the total cost of certain depreciating assets first held and used, or first installed ready for use, for a taxable purpose in the 2016–17, 2017–18 and 2018–19 income years (combined) exceeds $100 million.
The requirement to have a minimum total cost of depreciating assets for the three previous income years ensures that eligible entities have a track record of making substantial investments in Australia.
Additional exclusions for entities qualifying under the alternative test
The Bill introduced new exclusions which only apply to entities which qualify under the alternative test. The previously existing exclusions will apply to all entities regardless of whether they qualify under the original test or the alternative test.
The following table summarises which exclusions apply to a qualifying entity:
Balancing adjustment where asset not used for carrying on business or not in Australia
The Bill also introduced a balancing adjustment event into the temporary full expensing provisions. Broadly, the event occurs if a depreciating asset that has been fully written off under the incentive subsequently:
- ceases to be used for the principal purpose of carrying on a business — e.g. it is wholly or principally applied for private use; or
- is not used principally in Australia — i.e. it remains overseas or is relocated overseas.
The first element of cost is modified so that it is the asset’s termination value at the time of the event and the temporary full expensing deduction is clawed back.
The temporary full expensing rules will no longer apply to work out the decline in value for that asset for a later income year. However the entity may claim any other capital allowances it is entitled to for that asset (for example, under the general capital allowances rules for the proportion of business use).
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