Temporary Full Expensing of Assets – Tips and Traps

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Businesses with an aggregated turnover of less than $5 billion can now claim immediate deductions for the full costs of depreciating assets held from 7.30pm AEDT on 6 October 2020 and first used, or installed ready for use, by 30 June 2022. This initiative is part of the 2020-21 Federal Budget measures and has now become law.

The new rules are complex and it is partly due to the interaction between the new rules and the existing instant asset write-off provisions that were introduced in April 2019 as part of the 2019-20 Federal Budget measures and later expanded in March 2020 as part the Government’s COVID-19 stimulus. Depending on whether an entity qualifies as a Small Business Entity (SBE), Medium-sized Business (MSB) or large business, slightly different rules apply.

Small Business Entities

An entity qualifies as an SBE if:

  • it carries on a business; and
  • its aggregated turnover is less than the threshold (e.g. $10 million from 2016-17 income year for capital allowance purposes).

The only change under the new rules that affects SBEs is that there is no longer a threshold for the cost of depreciating assets. Therefore, the Temporary Full Expensing of Assets (TFEA) provisions will apply to eligible depreciating assets that are:

  • first held after 7.30pm AEDT on 6 October 2020; and
  • first used, or installed ready for use, for a taxable purpose on or before 30 June 2022.

The following assets are specifically excluded under the TFEA provisions:

  • Building and leasehold improvements under Division 43 of the Income Tax Assessment Act 1997 (ITAA97);
  • Film production assets;
  • Assets previously allocated to low-value pool;
  • Software development pool assets;
  • Certain primary production assets (e.g. horticultural plants, fodder storage assets, water facility and fencing assets); and
  • Eligible work-related items for the purposes of section 58X of the FBT Act.

Importantly, there is no longer a threshold applying to the Small Business General Pool. This means the balance of the pool can be claimed in full at the end of the income year after 7.30pm AEDT on 6 October 2020 (e.g. 30 June 2021 for most taxpayers).

Finally, the immediate deductions for SBEs under the TFEA provisions are available for new, as well as second-hand assets. Therefore, the timeframe for the availability of the instant asset write-off for SBEs from the 2019-20 income year onward can be summarised in the table below:

Medium-sized Businesses

An entity qualifies as an MSB if:

  • it carries on a business; and
  • its aggregated turnover is between $10 million and less than $50 million.

The TFEA provisions for MSBs apply similarly to those applying to SBEs above. However, there is an additional requirement for MSBs where the depreciating asset, at the time it is first used or installed ready for use for a taxable purpose, must satisfy the following requirements:

  • it is located in Australia; and
  • it is reasonable to conclude that the taxpayer will use the asset principally in Australia for the principal purpose of carrying on a business.

Further, MSBs do not have access to the Small Business General Pool. They can, however, use the accelerated depreciation rate under the Backing Business Investment (BBI) initiative. The timeframe for the availability of the instant asset write-off for MSBs from the 2019-20 income year onward can be summarised in the table below:

Large Businesses

Under the TFEA provisions, an entity qualifies as a large business if:

  • it carries on a business; and
  • its aggregated turnover is less than the threshold (e.g. between $50 million and less than $500 million from 12 March 2020 to 7.30pm AEDT on 6 October 2020 and between $50 million and less than $5 billion from after 7.30pm AEDT on 6 October 2020 to 30 June 2022).

In addition to the requirements for SBEs and MSBs, large businesses must also satisfy the following additional requirements under the TFEA provisions:

  • the entity must not have entered into a commitment to hold, construct or use the asset before 7.30pm AEDT on 6 October 2020; and
  • the depreciating assets must not be second-hand assets.

The timeframe for the availability of the instant asset write-off for large businesses from the 2019-20 income year onward can be summarised in the table below:

Finally, an entity can make an irrevocable choice to opt out of the temporary full expensing provisions (and the previous Instant Asset Write Off provisions) on an asset-by-asset basis for the purpose of working out its capital allowance deductions for an income year for each eligible asset.

MKT Note

Although the TFEA provisions are generous, the interaction between the existing rules and the new rules mean the provisions become unnecessarily complex. Tax accountants will need to get it right during the preparation of the 2020 income year onward.

Advisers also need to be aware of the flow on effects of using these generous concessions given they are not optional.  Businesses that have significant capital expenditure may find themselves in a tax loss position for a number of years, perhaps limiting their ability to either pay (companies) franked dividends or distribute (trusts) franked dividends through to beneficiaries.

If you have any queries on the TFEA provisions above, please contact Peter Hong.

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