On 2 December 2020, legislation was introduced to make certain changes to the Temporary Full Expensing (TFE) rules.
The original TFE rules came into effect on 6 October 2020 which allow eligible businesses to deduct the full cost of eligible depreciating assets first held, and first used or installed ready for use between 6 October 2020 – 30 June 2022.
The legislative changes make the following amendments:
- an alternative mechanism to test whether an entity satisfies the $5 billion turnover threshold; and
- the ability for entities to opt out of TFE on an asset-by-asset basis.
- Alternative Test
An entity will satisfy the alternative $5 billion test if the following requirements are met:
- the entity is a company;
- the entity’s total ordinary and statutory income other than non-assessable non-exempt income is less than $5 billion for either the 2019 or 2020 income years; and
- the total cost of certain depreciating assets first held and used, or first installed ready for use in the 2017, 2018 and 2019 income years combined exceeds $100 million.
Under the alternative test, the TFE will not be allowed for intangible assets, assets previously held by associates and assets available for use by associates that are not Australian residents.
The alternative test was introduced to allow Australia-based businesses that are connected with large global groups to access the TFE measures.
- Choice to Opt Out
The changes the TFE rules will allow entities to opt out of the TFE and the accelerated depreciation rules on an asset-by-asset basis. Once the choice is made, the normal depreciation rules under Division 40 of the ITAA 1997 will be applicable to the relevant asset.
The opt-out choice is a welcome change for taxpayers who were previously concerned about the adverse implications from applying TFE and accelerated depreciation and finding themselves in a tax loss position whereby they would be limited in making franked distributions.
If you have any queries about the TFE rules, please contact Gaurav Chitnis.