Temporary full expensing of depreciating assets

Announced in the 2020 federal budget, most businesses have the option to take advantage of an ability to fully deduct the cost of new depreciable assets. The temporary measure is only available between 7:30pm AEDT on 6 October 2020 through to 30 June 2022.
Before and after these dates, other depreciation rules apply, including instant asset write-offs, Backing Business Investment regime and uniform capital allowances.

Business qualification

To be eligible to claim the full expense of an eligible depreciating asset, the business must have an aggregated annual turnover of less than $5 billion. New legislation has been announced which will provide an opportunity for more businesses to be eligible (see below).

Aggregated turnover takes its meaning from ITAA 1997 s 328-115, and generally is the sum of all the annual turnovers (ITAA 1997 s 328–120) of the following entities:

  • the test entity (in this case, the one claiming the deduction)
  • any entity that is connected with the test entity, and
  • any entity that is affiliated with the test entity.

An entity is connected to the test entity if either entity controls the other entity, or both are controlled by a third entity. An entity is affiliated with the test entity if they act, or could reasonably be expected to act, in accordance with the test entities wishes in relation to the business affairs of the test entity.

Aggregated turnover is reduced by any dealings (or intragroup transactions) between the test entity and any connected or affiliated entities.

Asset qualification

To qualify for an immediate deduction, the eligible depreciable asset must be first held, and first used or installed ready for use for a taxable purpose between 7:30pm AEDT on 6 October 2020 and 30 June 2022. This is wording that is similar to other provisions in the legislation such as the instant asset write-off and accelerated depreciation within Backing Business Investment.

There are no deduction limits relating to the cost of the asset. That is, an asset of any value is eligible for an immediate deduction (subject to other conditions). However, new legislation announced in November 2020 will allow businesses the option to opt-out of full expensing on an asset-by-asset basis. This will allow more flexibility in relation to claiming deductions, in particular for businesses who have marginal tax rates.

Businesses are also able to deduct the full cost of improvements to these assets and to other existing eligible depreciating assets made during the “full expensing” period.

Another general rule exists in situations where a larger entity ($50 million or more in aggregated turnover) entered into a commitment to incur a cost in relation to an asset before 7:30pm AEDT 6 October 2020. No full expensing deduction is allowed if, before the budget time, the entity:

  • entered into a contract under which it would hold the asset
  • started to construct the asset, or
  • started to hold the asset in some other way.

However, if the entity incurs costs relating to the second element of cost during the full expensing period, they will be allowed a full deduction.

An option to enter into a contract to hold an asset is not considered a commitment because an option does not require an entity to, in fact, enter into the contract.

Excluded assets

The following types of depreciating assets are excluded from qualifying as eligible depreciating assets for the purposes of full expensing:

  • Buildings or capital works (under ITAA 1997 s 40-45).
  • Assets allocated to a low-value pool, or expenditure allocated to a software development pool.
  • Assets where the taxpayer can deduct amounts under Subdiv 40-F (some primary production assets).

Importantly, an asset is only eligible for full expensing if it is reasonable to conclude that the asset will be used principally in Australia for the principal purpose of carrying on a business. This test (on usage) applies when the asset is first used or installed ready for use.

Subsequent balancing adjustments may need to be considered if an asset becomes ineligible at a point in time after first usage.

Second hand assets

Only entities with an aggregated turnover less than $50 million are able to utilise the full expensing option for second hand assets.

However, an entity with aggregated turnover over $50 million will be entitled to full deduction for the second element of cost incurred between the eligible full expensing dates.

Small business entities

Small business depreciation pools are allowed for entities with aggregated turnover under $10 million. Current rules allow assets costing less than $150,000 to be immediately deducted from the pool. Also, small business entities can deduct the second element of cost, up to $150,000, of assets incurred in the period.

The current deadline for assets under $150,000 to be installed ready for use by 31 December 2020 to get the immediate deduction has been extended to 30 June 2021. This amendment relates to assets purchased prior to 7:30pm AEDT on 6 October 2020.

The temporary full expensing rules allow a small business entity to claim an immediate deduction for the cost of an asset of any value. This includes both the first element and second element of cost. However, a small business entity will have the option, on an asset-by-asset basis, to irrevocably opt-out of full expensing and revert to:

  • backing business investment rules (57.5% in the first year), or
  • general small business depreciation rules (18.75% in the first year).

Also, small business entities can deduct the entire balance of their general small business pool during the full expensing period. This would include the 2020–21 and 2021–22 income years. As above, small business entities will have the option to irrevocably opt-out so that the entire pool balance is not claimed in a particular income year.

Entities over $5 billion in aggregated turnover

New legislation introduced in December 2020 will allow an alternative test for entities who earn over $5 billion in aggregated turnover to utilise the full expensing regime. If the entity has:

  • less than $5 billion in total statutory and ordinary income in either the 2018–19 or 2019–20 income year, and
  • invested more than $100 million in Australian-only tangible depreciating assets during the period 1 July 2016 to 30 June 2019,

they will qualify for full expensing on new depreciable assets. This change will mean businesses who fail the $5 billion aggregated turnover test due to an overseas parent or associate may still qualify for the enhanced deduction.

Entities who have a substituted accounting period year end for 2019-20 after 6 October 2020 are only allowed to calculate income levels for their 2018-19 year.

In terms of large entities making substantial investments over the past 3 years, entities will need to exclude assets that were not expected to be used principally in Australia when purchased.

Risk mitigation steps

Under decline in value rules, an entity is required to be using the asset (or be installed ready for use) during the income year to claim a deduction. Therefore, if an asset is purchased in the 2020–21 income year, but not used until 2021–22, the full deduction (on cost and any installation) is not available until the 2021–22 income year.

Practically, if an entity purchased an asset in 2020–21 under Backing Business Incentive, but before budget time, the allowable deduction for the 2020–21 income year is:

  • 50% of the cost of the asset (BBI regime), plus
  • depreciation on the remainder of cost of the asset and any second element amounts before 7:30pm AEDT on 6 October 2020 (uniform capital allowances), plus
  • full expense of any second element amounts between 7:30pm AEDT on 6 October 2020 and 30 June 2021.

Other considerations

Cost is generally reduced for any non-taxable use.

Cost limit for motor vehicles still applies. The full expensing regime amends an entity’s ability to claim decline in value. No such amendment exists to the Subdivision relating to the first and second elements of cost (which limits the deduction for luxury cars).

Where a balancing adjustment applies in the same year of purchase/installation, full expensing cannot apply (as balancing adjustment rules apply instead). Also, special balancing adjustment rules will apply in situations where the full expense is claimed, and then:

  • the asset is moved overseas (or used primarily outside an Australian business)
  • a change in the private use occurs before the end of the asset’s usual effective life.
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