This article was originally published October 2020, and updated October 2022.
As part of the Federal Government’s COVID-19 business rescue response aimed at encouraging business investment, the Government introduced legislation that allows for the temporary full expensing of depreciating assets and the temporary loss carry back offset rules. This article focuses on the original and expanded temporary full expensing rules. Also refer to the article on Company Loss Carry Back Offset rules.
Temporary Full Expensing of Capital Assets
The temporary full expensing rules which are now law, allow eligible businesses to deduct the full cost of eligible depreciable assets of any value in the year they are first held, and first used or installed ready for use for a taxable purpose from 6 October 2020 to 30 June 2023. Businesses will also be able to deduct the full cost of improvements to these assets and to existing eligible depreciating assets made during this period.
Eligible Entities
Generally, to be eligible for the full expensing of eligible assets, an entity must be either:
- Carrying on business and have an aggregated turnover less than $5 billion; or
- A corporate tax entity that meets the ‘Alternative income test’ (see below)
Eligible assets
In addition, to be eligible for the full expensing, a depreciating asset must be:
- first held, and first used or installed ready for use for a taxable purpose, after 6 October 2020 and on or before 30 June 2023; and
- located in Australia and principally used in Australia for the principal purpose of carrying on a business.
However, the depreciating asset must not be:
- excluded from the uniform capital allowance rules in Division 40 of the ITAA 1997 (such as a building or other capital works); or
- subject to the capital allowance rules in Subdivision 40-E (about low value and software development pools) or 40-F (about primary production depreciating assets) of ITAA 1997.
Additional exclusions apply if the entity has an aggregated turnover of $50 million or more. For these entities, a depreciating asset that starts to be held after 6 October 2020 will be excluded from an immediate deduction if:
- the entity had already entered into a commitment to hold, construct or use the asset on or before 6 October 2020. Note however, an option to enter into such a contract is not considered to be a commitment; or
- the asset is a second hand asset.
Alternative Income Test - Eligibility
To qualify for the alternative test, a corporate tax entity which includes a company must have:
- less than $5 billion in total statutory and ordinary income (excluding non-assessable non-exempt income) in either the 2018-19- or 2019-20-income year; and
- invested more than $100 million in tangible depreciating assets in the period 2016-17 to 2018-19.
This change will mean businesses with an aggregated turnover of more than $5 billion due to the income of an overseas parent or associate can now qualify for the incentive provided they also meet the above additional investment requirements.
The alternative income test has expanded access to the temporary full expensing rules enabling more large Australian businesses with a track record of investing in Australia to qualify for the measure. The expanded rules allow Australian companies to access the incentive by disregarding foreign parents and/or associates’ turnover in relation to the $5 billion aggregated turnover. Businesses can also opt-out of temporary full expensing on an asset-by-asset basis.
Second hand assets
Consistent with the Federal Budget announcement, the amendment provides that businesses with aggregated turnover of less than $50 million will be entitled to an immediate tax deduction for the full cost of second hand assets.
An asset held by an entity will be a second hand asset if:
- another entity held the asset when it was first used, or first installed ready for use (other than as trading stock or merely for the purposes of reasonable testing and trialling). However, if the asset is an intangible asset, this exclusion will not apply unless the asset was used by the other entity for the purpose of producing ordinary income before the holding entity first used it, or had it installed ready for use, for any purpose. (For these purposes, any ordinary income derived by the other entity as a result of the disposal of the asset to the holding entity is disregarded)
- the entity started to hold the depreciating asset because the asset was split or merged
- the asset is a licence or a sub licence in relation to an intangible asset; and the intangible asset is a second hand asset
- the depreciating asset was held by an entity that was previously a member of a consolidated group or multiple entry consolidated (MEC) group and if the entity started to hold the asset after 6 October 2020.
If the above conditions for a second hand asset are satisfied, temporary full expensing applies to allow a full deduction for the second element of cost of the asset (i.e., cost of improvements to an asset) that is incurred between 6 October 2020 and 30 June 2023.
Opting out of full expensing on an asset-by-asset basis
In addition, businesses can also opt-out of temporary full expensing and the backing business investment incentive on an asset‑by‑asset basis. This change will provide businesses with more flexibility in respect of these measures, removing a potential disincentive for them to take advantage of these measures.
Small business entities
Small businesses (with aggregated annual turnover of less than $10 million) can apply the temporary full expensing rules, but the rules for small business entities are contained in the existing small business entity provisions which do not allow these small businesses to apply the full expensing rules on an asset-by-asset basis. However, these small businesses can opt-out of the simplified depreciation rules for all their assets for the year in which they want to claim temporary full expensing. In addition, the provisions which prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt-out will continue to be suspended for the 2021-, 2022- and 2023-income years. The reason why small business entities may want to opt-out is because claiming the full expensing may cause problems for small businesses operating through trusts and companies that want to have franking credits available to frank dividends.
Also these small businesses that have opted into simplified depreciation are able to deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies.
Small to medium-large business entities
Business entities with turnover of less than $500 million that do not qualify for temporary full expensing of depreciating assets may still be entitled to the previously announced “enhanced instant asset write‑off” that allows a write off of the full value of assets with value of less than $150,000. However, the time by which such assets must be first used or installed ready for use to qualify for the enhanced instant asset write‑off is extended until 30 June 2021 (previously 31 December 2020).