The Tax Upside of a Mostly Downside Year: Temporary Full Expensing of Depreciating Assets

Overview

The business world has endured a lot in the 2020/21 financial year. However, along with unprecedented disruption to market forces have come Government concessions and incentives that mean there has never been a better time in recent years to purchase a new capital asset for your business.

The Federal Government’s capital allowance concession, known as ‘temporary full expensing’, extends the scope of the pre-existing instant asset write-off to apply to more businesses (by increasing maximum aggregated turnover from $50 million to $5 billion) and assets (by removing the $25,000 asset value cap).

If you have been thinking about adding a new piece of plant or equipment, company car or plane, then a reminder of the key details of the scheme is set out below.

Eligibility

There are two key sets of qualifying criteria for the concession:

• business size; and
• timing of purchase and first use of the relevant capital asset.

Business size

The concession is available to entities with an aggregated turnover of less than $5 billion (ie, including entities that are connected to, or affiliated with, the taxpayer). Alternatively, if the entity is a company (or an entity that is treated as a company for tax purposes; for example, a corporate limited partnership), then it may also qualify if it meets the alternative test.

The alternative test will enable a business with an aggregated turnover of more than $5 billion in the 2020/21 financial year to access the concession if:

• it had less than $5 billion in statutory and ordinary income (ie, excluding NANE income) in either the 2018/19 or the 2019/20 financial year; and
• it has invested more than $100 million in tangible depreciating assets during the 2016/17 and 2018/19 financial years.

Timing

Eligible assets must have been acquired after 7.30pm AEDT on 6 October 2020 (being the date of the 2020 Federal Budget) and first used or installed by 30 June 2022.

Exclusions

Temporary full expensing is only available for the purchase of new assets. However, the purchase of second-hand assets may still be eligible for the original instant asset write-off concession. Further exclusions with more narrow application include:

• certain pooled assets (eg low value pool, software development pool);
• assets held under a commitment entered into before 6 October 2020; and
• assets that are not held or used in Australia.

Additional Considerations

Accessing temporary full expensing is optional and taxpayers may choose not to claim the deduction in certain circumstances including those set out below.

Tax consolidation

If temporary full expensing is applied to an asset, this will have important implications if the entity holding that asset forms part of a tax consolidated group in the future. This is because the tax cost of the asset for the purpose of the cost setting rules will be its terminating value (ie nil) and there can be no ‘step-up’ in the cost of the asset.

Loss utilisation

There may be limitations on the ability of the taxpayer to apply excess losses forward to reduce future taxable income under existing rules, depending on the entity type. Companies may be able to claim the refundable loss carry back offset (which was a measure introduced to specifically interact with temporary full expensing) to obtain a tax refund in respect of prior years.

Key Points

• Applies to small and large businesses with less than $5 billion aggregated turnover.
• Applies to new assets only (second-hand assets may still be eligible under the original instant asset write-off concession).
• Asset must be purchased and first used between 6 October 2020 and 30 June 2022.
• Uncapped asset value.
• Consider tax planning implications (in particular, the utilisation of excess losses and future inclusion of the asset-holding entity in a tax consolidated group).

Further Detail

Loss carry back tax offset | Australian Taxation Office (ato.gov.au)

Temporary full expensing | Australian Taxation Office (ato.gov.au)

Instant asset write-off | Australian Taxation Office (ato.gov.au)

Questions

For further information regarding the above, please contact the author Lesley Naik, Senior Associate, at l.naik@cornwalls.com.au, or any member of our Tax team.

Disclaimer

This information and contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.