Temporary Full Expensing – Is it Worthwhile Opting Out?

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Temporary Full Expensing – Is it Worthwhile Opting Out?

When preparing 2021 tax returns for business entities, Temporary Full Expensing (TFE) will no doubt be one of the largest deductions that will be claimed. In most cases, the TFE will be beneficial as it will essentially ‘bring forward’ deductions claimable in future years. However, the TFE may also result in unintended consequences. It is therefore important to consider the impact of TFE in light of future tax planning.

We have outlined below scenarios in which the application of TFE may not be desirable.

TFE could be problematic for trusts planning to make franked distributions to its beneficiaries. In order to make a distribution, a trust must have net income. The application of TFE by a trust could potentially result in a tax loss whereby intended distributions cannot be made to beneficiaries.

Where accounting and tax depreciation are aligned, TFE could result in significantly lower accounting profits and net assets. This would not be desirable from a lender’s or acquirer’s perspective.

Further, and most importantly, applying TFE must be considered in light of any impact in future years. That is, as the written down value of assets under TFE will be nil, the future disposal of such assets in the future will generate significantly large balancing adjustment charges. In some cases, it may be more beneficial claiming depreciation over the effective life of the asset rather than in the year of acquisition.

For example, a start-up business may have acquired significant plant & equipment in year one in which TFE is applied. This will likely generate carried forward tax losses. In order to apply such losses, the relevant company and trust loss rules will need to be considered in the future to claim those losses against future income. Where there may be difficulties in satisfying these tests, it may be more beneficial to claim depreciation under the ordinary rules rather than TFE.

Once it has been determined that it will be preferable not to apply TFE, the opt-out rules will need to be considered. For entities not using simplified depreciation this is straight-forward – the TFE rules allow an opt-out on an asset-by-asset basis.

However, for entities using simplified depreciation, the opt-out is not possible, unless a choice is made to exit simplified depreciation and to use the normal depreciation rules instead. This would allow an opt-out choice for any new assets acquired in 2021 and onwards.

However, any general pool balance at 1 July 2020 will need to be written off notwithstanding that the entity has exited simplified depreciation. Unfortunately, despite rigorous lobbying from the professional bodies, the TFE rules have not been amended to accommodate for an opt-out for the small business general pool.

If you have any queries on Temporary Full Expensing, please contact Gaurav Chitnis.

 

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