Full expensing depreciation concessions

Full expensing of depreciating assets - does it work for you?

As a result of the continued impact of the COVID-19 pandemic on the Australian economy, the Federal Government announced as part of the 2020-21 Budget a major overhaul to depreciation tax concessions.

Previously, eligible businesses were able to deduct the cost of certain assets acquired, provided the asset cost less than $150,000. Not only has the Government provided almost all businesses with access to such concession, but eligible businesses are now able to deduct the cost of eligible depreciating assets with no cost limit, provided the asset is acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022.

Eligible businesses

An eligible business has to satisfy either the primary or alternative test as follows:

1. A business that has aggregated turnover of under $5 bn.

Under this primary test: whether a business satisfies the aggregated turnover threshold can be determined if any of the following requirements are satisfied:

• Aggregated turnover of $5 bn or less for the previous income year; or
• Likely aggregated turnover of $5 bn or less during the current year based on an assessment made at the commencement of the current year (provided the business did not have more than $5 bn aggregated turnover during either of the preceding two income years); or
• Actual turnover of $5 bn during the current year.

The business's aggregated turnover comprises the annual turnover of the business itself, but also includes the turnover of any entity that is either connected with or is an affiliate of the entity (except turnover derived between these related entities).

2. Corporate tax entities that satisfy certain criteria.

Corporate entities that qualify under this alternative test must have invested in depreciating assets costing greater than $100m during the 2017, 2018 and 2019 income years. Should this requirement be satisfied, and if the corporate entities' ordinary and statutory income for either the 2019 or 2020 income years is less than $5 bn, it will satisfy this test. Importantly, this means that such a corporate entity could have income of $5 bn or greater during the 2019 or 2020 income year and still be eligible for the concession.

Eligible assets

As mentioned above, eligible depreciating assets must be acquired from 7:30pm AEDT on 6 October 2020 and be either installed ready for use or actually used before 30 June 2022. The asset cannot be subsequently disposed of during the income year. In addition, the asset must be a depreciating asset that is subject to Division 40 of the Income Tax Assessment Act 1997 (“ITAA97”) and must not be:

• Capital works subject to Division 43 ITAA97;
• Low-value pool assets;
• Assets that have been allocated to a software development pool;
• Specific types of primary production depreciating assets; and
• Overseas assets.

There are also specific asset exclusions if a business has aggregated turnover of $50m or more, or only satisfies the corporate entity requirements:

Businesses with $50m or more turnover

• The purchase of second-hand assets is not eligible; and
• Assets that were acquired under a commitment that was entered into prior to 6 October 2020 i.e. if an eligible business or corporate entity was already committed to the asset acquisition before the rules were announced, the asset is not eligible.

Corporate tax entities only (who satisfy the $100m asset investment criteria above)

• Intangible assets;

• Assets that were previously held by the corporate entities associate; and

• Assets that the corporate entities associate or foreign residents are able to use.

Opting out of rules

 The full expensing rules apply automatically to businesses that qualify. Recognising that some businesses may wish to not apply the rules, the Federal Government has allowed businesses to opt-out of utilising the concessions on an asset by asset basis, provided:

• the choice is made in the approved form; and
• the choice is provided to the Commissioner by the lodgment due date of the relevant tax return.

It may seem counter-intuitive that a business would opt against claiming an immediate deduction for assets acquired. However, there are certain scenarios where a business would prefer to deduct an asset's cost over time under the ordinary depreciation rules, such as:

Tax-free threshold utilisation

Depending on the quantum of assets immediately deducted, a sole trader, partnership of sole traders or trust’s taxable income may be reduced by such a large degree that it is either below the tax-free threshold or eliminated entirely (resulting in a tax loss) for the sole trader, partnership of individuals or the beneficiaries of a trust.

The non-utilisation of the tax-free threshold during any income year may result in an increase in taxes paid over time as compared to claiming depreciation deductions.

Loss-making businesses

On the basis that these businesses do not derive taxable income, immediately deducting the cost of assets may cause issues with utilising the tax losses generated from the immediate deductions in the future based on the loss recoupment rules.

However, companies may also be able to access the loss carry-back provisions in the 2021 financial year which may provide a benefit to creating a loss in the 2021 year.

Businesses joining a tax consolidated group

Should a company utilise the full expensing concessions and subsequently join a tax consolidated group; the consolidated group will forgo the tax cost that is attributable to the businesses depreciating assets. This may partially be offset by losses that might be transferred to the head company, however, these losses will be subject to testing and if able to be transferred, utilisation limited to the company's available fraction.

There may be other reasons to opt-out of utilising the full expensing concessions and each business should consider its own circumstances in choosing to opt-out of full expensing.

Small businesses opt-out issues

Whilst all businesses are able to opt-out of the full expensing rules for assets purchased on an asset by asset basis, small business entities (less than $10m turnover) who have elected to utilise small business pooling are currently required to write-off the full balance of their general small business pool at the end of the 30 June 2021 income year, and have no choice to opt-out of this write-off.

As discussed above, creating a deduction for the full expensing of a small business's general pool may cause adverse tax consequences.

Recognising this issue, various accounting bodies have released a joint submission to the Federal Government to point out this anomaly in the full expensing rules. However, as it stands, if you are a small business entity, you must write-off the full balance of your pool as at 30 June 2021.

RSM's closing thoughts

There is no doubt that the full expensing depreciation concessions will provide immediate tax relief for growing, profitable eligible businesses. Whether these concessions provide an incentive for other eligible businesses to invest in additional assets remains to be seen.

In certain circumstances, the full expensing provisions may result in unfavourable tax outcomes, therefore each taxpayer should consider whether it is appropriate to opt-out of these provisions on an asset by asset basis.

Please note the full expensing rules are complex in nature and our above analysis is only a summary of how they operate. As such, this article should not be considered taxation advice.