In the 2020 Budget, the federal government initiated several stimuli to keep business moving. One of these was the provision to fully expense eligible items for the cost of assets in the year the asset was first used or installed ready for use to a taxable purpose. This initiative was set to end on 30 June 2022, but has now been extended for a full year, until 30 June 2023.
Pro Tax Tip: Unlike the instant asset write off, there is no limit to the cost of an asset under full expensing rules to eligible businesses.
Which Businesses Are Eligible?
Under this extension, the rules of eligibility have been modified. Eligible businesses must be a business with an aggregated turnover of less than $5 billion or be a corporate tax entity that meets the alternative income test.
Alternative Income Test For Temporary Full Expensing
If your business doesn’t meet the $5 billion turnover test, this rule gives another level of eligibility. To meet this test:
- Your total ordinary business income and statutory income (excluding non-assessable non-exempt income – NANE income) is less than $5 billion for either the
- 2018–19 income year
- 2019–20 income year if that year ends on or before 6 October 2020.
- The total cost of certain depreciating assets 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, including the cost of
- improvements in the year a depreciating asset was first used – or first installed ready for use – for a taxable purpose
- a depreciating asset that is capital works, which is determined under ordinary cost rules for depreciating assets and not reduced by any portion deductible outside those rules.
Intangible assets or depreciating assets not principally used in Australia or located in Australia are not taken into account. Certain assets are excluded.
If your business is eligible, it can claim an immediate deduction for eligible new and second hand assets used or installed ready for use for the 2020-21, 2021-22, and 2022-23 income years.
New assets should be installed and ready for use for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2023. If your business in installing second hand assets, the assets should be first held, first used or installed ready for use between 7.30pm AEDT on 6 October 2020 and 30 June 2023. Your business should have an aggregated turnover of less than $50 million and the assets must be used for a taxable purpose.
Improvements to eligible assets also fall under this rule. Any improvement must be made 7.30pm AEDT on 6 October 2020 and 30 June 2023.
Simplified Depreciation Rules
Some small businesses, prior to the rule, were depreciating assets. Some of these assets can be taken over to be fully expensed, however there are rules.
The business-related portion of assets in the small business pool must have been installed and ready for use for a taxable purpose from 7.30pm (AEDT) on 6 October 2020 to 30 June 2023. Again, there is no threshold to the cost of the asset.
These assets must be immediately deducted if you choose this option. You also deduct the balance of the small business pool at the end of an income year ending between 6 October 2020 and 30 June 2023.
Pro Tax Tip: If your business is eligible, the pool’s closing balance for the income year could be zero after full expensing.
You can choose to opt out of full expensing for an income year. This is taken in an asset-by-asset case, but only if you’re not using the simplified depreciation rules.
To opt out, you must do so in your tax return by the day you lodge your tax return for the income year in which your choice relates.
Pro Tax Tip: The temporary full expensing rule might result in a tax loss for the year. If you’re a corporate tax entity, instead of carrying the tax loss forward to offset future income, you might consider eligibility for a refundable tax offset under the loss carry back rule.
Loss Carry Back
The Loss Carry Back provides a refundable tax offset for eligible businesses to claim after the end of their 2021-21, 2021-22 and 2022-23 income years. This can be claimed in the 2020-21, 2021-22 and 2022-23 company tax returns.
Under this rule, losses can be carried back to earlier years in which there were tax liabilities. The offset allows savings on tax that would have been paid by deducting the loss in the earlier year. This may result in a cash refund, a reduced tax liability or a reduction of debt owed to the Australian Taxation Office (ATO).
Other depreciating incentives are available to businesses, and include temporary full expensing, instant asset write off, backing business investment and the general depreciation rules. It’s worth working out which rule suits your business the best and offers the best advantage. ITP Accounting Professionals offer specialist business help when it comes to reducing your business tax bill.