Temporary Full Expensing Provisions

The temporary full expensing (TFE) of depreciating assets measure announced in the 2020-21 Federal Budget is now law. The Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 (the Bill) received Royal Assent on 14 October 2020.

The TFE provisions allow eligible businesses with an aggregated turnover of less than $5 billion to claim a tax deduction for the full cost of an eligible depreciating asset purchased between 6 October 2020 and 30 June 2022 (the relevant period).

Unlike the instant asset write off (IAWO), there is no cost threshold and eligible entities can claim a full tax deduction on the purchase of eligible assets irrespective of cost.

Which entities are eligible?

Entities which carry on a business and have an aggregated turnover of less than $5 billion are eligible for TFE. Aggregated turnover includes the turnover of your connected and affiliated entities. Additionally, the assets must be located in Australia and used in Australia for the principal purpose of carrying on a business.

What are the rules for small and medium businesses (aggregated turnover of less than $50 million)?

Small and medium businesses can claim the full cost of new or second-hand assets purchased during the relevant period.

The following assets are not eligible for TFE:
  • assets allocated to a low value pool or software development pool
  • certain primary production assets
  • buildings and capital works
Small businesses which utilise the simplified depreciation rules (those with aggregated turnover of less than $10 million), can also claim the full balance of their small business pool during the relevant period. This will effectively give certain small businesses a tax deduction for the written down value of most depreciating assets held at the end of the 2020-21 income year.

ABC Pty Ltd (ABC) has a Small Business Pool balance of $2.5 million on 1 July 2020. During the 2020/21, ABC purchased the following assets:
  • 5 July 2020 – a second hand truck worth $140,000
  • 15 October 2020 – a new crane worth $700,000
During the 2020/21 financial year, ABC will be able to:
  • Deduct the cost of the Truck worth $140,000 in full under the IAWO provisions. (note, TFE applies from 6 October 2020).
  • Deduct the cost of the Crane costing $700,000 in full under the TFE provisions.
  • Claim the Small Business Pool balance – $2,500,000.
In total, ABC can claim $3,340,000 in depreciation during the 2020-21 financial year.

What are the rules for businesses with aggregated turnover of more than $50 million (but below $5 billion)?

Business within this turnover threshold can claim the the full cost of new assets only under the TFE provisions. In addition to the exclusions that apply to small and medium businesses mentioned above, these entities are unable to claim the full cost of second hand assets (except where the IAWO is used) and will be denied a deduction where a commitment to purchase the asset was entered into before 6 October 2020.
Second hand assets below the $150,000 IAWO threshold may be deductible in full under the IAWO provisions. As a reminder, businesses with a turnover of $50 million - $500 million have access to the IAWO for assets acquired between 12 March 2020 and 31 December 2020. These assets need to be installed by 30 June 2021 to be deductible under the IAWO provisions during the 2021 financial year.

What are some practical considerations you need to bear in mind?

Whilst businesses may want to take advantage of the TFE measures, some practical issues to keep in mind include (but are not limited to):
  • The car cost limit of $59,136 applies during the 2020-21 income year and businesses cannot claim the cost of cars above this limit.
  • One of the key eligibility requirements is for the entity to carry on a business which is a question of fact. Entities which conduct passive activities (e.g. trusts owning investment properties) may not be eligible for TFE.
  • If your business has substantial capital outlays each year, these provisions may result in substantial revenue losses. Companies may be eligible to carry back these losses to an earlier income year and claim a refund of tax paid (if any). The earliest year a company can carry back a tax loss to is the 2018/19 income year.
  • The TFE measures apply to the second element of cost of a depreciating asset as well i.e. costs incurred in improving a depreciating asset (costs which are not ordinarily deductible repairs).
The upfront deduction is available until 30 June 2022, but businesses should bear in mind that these costs would be deductible over the life of an asset under our ‘normal’ depreciation rules (i.e. it is not a case of ‘use it or lose it’). The deduction will just be spread over a few years.

Capital expenditure needs to be well thought out and consideration needs to be given into how a business will finance the acquisition costs of any significant asset purchases - cash flow planning is critical.

Contact your Moore Australia advisor today to check how these rules will impact your business.