Draft Law Companion Ruling on Temporary Full Expensing
On 9 June 2021, the ATO released draft Law Companion Ruling LCR 2021/D1 in relation to the Temporary Full Expensing (TFE) rules.
The draft LCR provides detailed guidance on the application of the TFE rules. The focus of this article will be on the guidance provided in relation to the interaction between the Instant Asset Write Off (IAWO) and Backing Business Investment (BBI) measures to TFE and some issues for Small Business Entities (SBEs) using the simplified depreciation rules.
IAWO and BBI
From 12 March 2020 to 31 December 2020, the IAWO rules allowed entities with an aggregated turnover of less than $500 million to deduct in full the cost of depreciating assets costing less than $150,000 that are used or installed ready for use by 30 June 2021.
The BBI measures were also introduced on 12 March 2020 allowing entities with an aggregated turnover of less than $500 million to deduct 50% of the cost of depreciating assets costing more than $150,000 that are used or installed ready for use by 30 June 2021.
The main difference between the IAWO and the BBI rules are that the BBI does not apply to second hand assets and commitments for assets entered into before 12 March 2020. The IAWO applies to second hand assets and commitments entered into prior to 12 March 2020.
From 6 October 2020, the TFE measures have in most cases superseded the IAWO and BBI measures. However, in instances where an entity with an aggregated turnover of $50 million or more acquired a second had asset during the period 7 October 2020 – 31 December 2020, the IAWO rather than the TFE measures would apply to this asset. This is due to the second hand asset exclusion for entities with an aggregated turnover of $50 million or more than applies to TFE but not IAWO.
Similar to the TFE rules, there is an opt-out choice for the BBI measures. That is, an entity can choose for the BBI rules to not apply on an asset-by-asset basis. This was a welcome modification to the rules which now provide flexibility to entities in choosing whether to deduct 50% of an asset under the BBI measures or apply the ordinary Division 40 rules to such assets.
In contrast, the opt-out choice is not available to the IAWO. For entities that acquired depreciating assets costing less than $150,000 prior to 7 October 2020 (before the TFE rules were introduced) do not have the opt-out choice for such assets.
While the opt-out choice is available for Division 40 entities (i.e. entities that do not use simplified depreciation), it is not available for SBEs using Subdivision 328-D. That is, unless an SBE using the simplified depreciation rules exits these rules and chooses to use the normal Division 40 rules instead, it will not have any flexibility in opting out of the TFE and BBI rules on an asset-by-asset basis.
As highlighted in MKT’s previous articles, this is a major concern for SBEs. While an SBE can exit the simplified depreciation rules, the full expensing of small business pools is mandatory. This can create significant issues for trusts whereby the full expensing could result in there being no distributable income whereby franked distributions could not be passed on to beneficiaries.
The draft LCR raises concerns in relation to certain arrangements where the TFE rules are used in a manner to create tax losses in order to generate refundable tax offsets under the loss carry-back measures. This would apply in circumstances involving transactions between related parties that facilitate the claim of the TFE and loss-carry back offsets.
The ATO is expected to provide further guidance on these integrity issues as they emerge.
If you have any queries on the ATO’s draft LCR or any aspects of the TFE, IAWO or BBI rules in general, please contact Gaurav Chitnis.