Temporary Full Expensing for SBEs
On 1 February 2021, CPA, CAANZ, IPA together with the Law Council of Australia and The Tax Institute, lodged a joint submission with the Treasury addressing concerns in relation to an anomaly with the Temporary Full Expensing (TFE) measures as they apply to SBEs.
To understand the nature of this submission, it is firstly important to understand how the TFE legislation ties into the existing depreciation provisions.
An SBE (i.e. an entity with an aggregated turnover of less than $10 million) has the choice to apply the capital allowance provisions under Subdivision 328-D rather than the ordinary depreciation rules in Division 40 of the ITAA 1997. If an SBE previously used Subdivision 328-D, it may still opt out of this Subdivision and instead use Division 40. However, if the SBE has a pool balance, this stays within Subdivision 328-D, notwithstanding that new assets are depreciated under Division 40.
The TFE rules require entities with a pool balance to fully deduct this balance between 7 October 2020 to 30 June 2022. Entities with a pool balance on 7 October 2020, will need to fully deduct this balance on 30 June 2021. SBEs that continue to use Subdivision 328-D from 1 July 2021, will need to deduct any pool balance accumulating from 1 July 2021 on 30 June 2022.
The TFE rules were amended on 2 December 2020 to allow businesses with the flexibility to choose whether to apply the full expensing on an asset-by-asset basis. Importantly, however, these amendments were only made to Division 40 and not Subdivision 328-D assets. While an SBE may choose to opt out of Subdivision 328-D and instead use Division 40 for any new assets, as the pool balance remains within Subdivision 328-D, the TFE rules require that this balance must be fully deducted.
The mandatory application of the TFE rules to SBE pools is problematic for discretionary trusts and unit trusts. Full expensing may result in a particular trust having no distributable income. In turn, the trust would then not be able to make franked distributions to its beneficiaries, effectively resulting in a “loss” of franking credits received by the trust.
The joint submission seeks “that the law be amended to provide SBE taxpayers with the same flexibility as larger businesses, and to ensure that larger businesses are not treated more favourably than SBEs, or those that are still subject to the pooling rules in Subdivision 328-D after making a choice to exit Subdivision 328-D”.
MKT will be keeping a close eye on any legislative changes to the TFE rules as a result of the concerns raised in the joint submission.
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