COVID-19 has caused a range of changes over the last year, with the immediate expensing of assets having undergone a number of amendments. We’ve summarised the current state of play for business.
Temporary full expensing: the current state of play
Businesses with turnover under $5 billion
Businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets. Corporate tax entities unable to meet the $5 billion turnover test may still be eligible for temporary full expensing under the alternative test.
The eligible new assets 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.
Businesses with turnover less than $50 million
For businesses with an aggregated turnover of less than $50 million, temporary full expensing also applies to the business portion of eligible second-hand depreciating assets.
Businesses can also immediately deduct the business portion of the cost of improvements to eligible depreciating assets (and to assets acquired before 7.30pm AEDT on 6 October 2020 that would otherwise be eligible assets) if those costs are incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2022.
If your income year ends on 30 June, deductions under temporary full expensing are only available in the 2020–21 and 2021–22 income years.
If an asset qualifies for an immediate deduction under temporary full expensing in an income year, you can choose to claim a deduction using other depreciation rules. However, you must notify the ATO in an approved form that you have chosen not to apply temporary full expensing to the asset. The choice is unchangeable and you must notify by the day you lodge your tax return for the income year to which the choice relates.
Which businesses are eligible for temporary full expensing?
Businesses can access temporary full expensing if the aggregated turnover is less than $5 billion.
The rules for calculating aggregated turnover are the same as those used for the small business entity concessions. Your aggregated turnover may include the annual turnover of other business entities, in addition to your own annual turnover.
Corporate tax entities that do not meet the $5 billion aggregated turnover test can access temporary full expensing if they satisfy an alternative income test.
Businesses can claim the deduction when lodging their 2020–21 or 2021–22 tax return (as applicable).
Which assets are eligible for temporary full expensing?
To be eligible for temporary full expensing, the depreciating asset must be:
- new or second-hand (if it is a second-hand asset, your aggregated turnover is below $50 million)
- first held by you at or after 7.30pm AEDT on 6 October 2020
- first used or installed ready for use by you for a taxable purpose (such as a business purpose) between 7.30pm AEDT on 6 October 2020 and 30 June 2022.
Exclusions
Eligible assets do not include:
- assets allocated to a low-value pool or a software development pool
- certain primary production assets (water facilities, fencing, horticultural plants or fodder storage assets), unless you are a small business entity who chooses to apply the simplified depreciation rules to these assets
- buildings and other capital works for which you can deduct amounts under Division 43
- assets that
- will never be located in Australia, or
- will not be used principally in Australia for the principal purpose of carrying on a business.
If your business has an aggregated turnover of $50 million or more, you are excluded from immediately deducting the cost of an eligible asset that is:
- a second-hand asset
- an asset you entered into a commitment to hold, construct or use before 7.30pm AEDT on 6 October 2020.
Additional exclusions apply for corporate tax entities who are eligible for temporary full expensing only through applying the alternative income test.
If your depreciating asset is not eligible for temporary full expensing, or you have chosen not to apply temporary full expensing, other depreciation provisions such as instant asset write-off or backing business investment – accelerated depreciation may apply.
Improvements to eligible assets and existing assets
As well as claiming an immediate deduction for the business portion of the cost of an eligible asset, you can also claim an immediate deduction for the business portion of the cost of any improvements to an eligible asset if they are incurred before 30 June 2022.
You can also claim for improvements to existing assets. Existing assets are assets that would be eligible assets except that you held them before 7.30pm AEDT on 6 October 2020. You cannot claim the acquisition cost of existing assets under temporary full expensing. However, you can claim an immediate deduction for the business portion of the cost of improvements incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2022.
Alternative income test for temporary full expensing
Corporate tax entities unable to meet the $5 billion turnover test can still be eligible for temporary full expensing if:
- their total ordinary income and statutory income (excluding non-assessable non-exempt income) is less than $5 billion for the 2018–19 income year (or for the 2019–20 income year if that year ends on or before 6 October 2020), and
- the total cost of certain depreciating assets (including cost of improvements) held and first used, or first installed ready for use, for a taxable purpose in the 2016–17, 2017–18 and 2018–19 income years (combined) exceeds $100 million.
For the purpose of determining whether the total cost of depreciating assets exceeds $100 million, you do not take into account assets that are:
- intangible assets
- depreciating assets if there is no reasonable conclusion they would be used principally in Australia for the principal purpose of carrying on a business or ever be located in Australia.
Assets excluded if applying the alternative income test
If you are only eligible for temporary full expensing under the alternative income test, a deduction cannot be claimed under temporary full expensing for the following assets:
- intangible assets
- assets previously held by your associates
- assets available for use, at any time in the income year, by your associates or entities that are foreign residents.
How to claim deductions under temporary full expensing
If your income year ends on 30 June, deductions under temporary full expensing are only available in the 2020–21 and 2021–22 income years.
If an asset qualifies for an immediate deduction under temporary full expensing in an income year, you can choose to claim a deduction using other depreciation rules. However, you must notify us in an approved form that you have chosen not to apply temporary full expensing to the asset. The choice is unchangeable and you must notify us by the day you lodge your income tax return for the income year to which the choice relates.
If your 2020–21 income year ends:
- On or after 30 June 2021, you can choose to claim the temporary full expensing and/or backing business investment accelerated depreciation in your tax return for that income year. The tax return forms for the 2020–21 income year will be updated with the additional labels required from 1 July 2021.
- Before 30 June 2021, refer to Temporary full expensing and backing business investment – Substituted accounting period or lodging a tax return for a part year.
Need more information? We can help.
If you would like more information about how these changes will impact you and your business, please contact our offices at info@leadgroup.com.au, and one of our team of consultants can assist you.
