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.
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.
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.
A depreciating asset qualifies for full expensing if, after the Budget time and on or before 30 June 2022, the entity:
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:
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.
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:
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 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.
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:
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.
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 ‘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.
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:
However, in some circumstances, an immediate deduction will be available under IAWO where it is not available under the full expensing rules:
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.
You can check out the recording of our special presentation,
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.