With the year that has been we can all be forgiven for being confused by what a business can or cannot claim with respect to assets purchased for use in their business. The goal posts have moved constantly over the last 9 months in an attempt by the government to incentivise businesses and somewhat reduce the inevitable economic effect which COVID-19 has wreaked on us. One of the big amendments the Government has focussed on has been deductibility of assets, giving businesses higher deductions upfront, thereby easing their tax burden.
As part of the initial economic recovery effort released by the Government, there was an increase to the instant write-off threshold from $30,000 to $150,000 for assets purchased between 12 March 2020 to 31 December 2020 (for those business with an aggregated turnover of less than $10 million). The release of the 2020/21 Federal Budget in October 2020 provided enhancements to the instant asset write off rules and the Treasury Laws Amendment (A Tax Plan for the Covid-19 Economic Recovery) Bill 2020 was passed into law on 14 October 2020, with the changes taking effect from 6 October 2020.
Under the new law the instant asset write-off now applies to businesses with an aggregated turnover of less than $500 million and has been extended to assets first used or installed and ready for use until 30 June 2021, provided those assets were purchased by 31 December 2020. In addition to this extension, however, is the introduction of the further write-off measures, as outlined below.
To try and stimulate the economy or, more realistically, just keep it afloat, new temporary Full Expensing of Depreciable Assets measures were introduced. Under these measures, Australian businesses with an annual turnover of less than $5 billion can claim the full value of all new depreciable assets first used or installed ready for used before 30 June 2022. Unlike the instant asset write off, there is no cap on the cost of the asset. The criteria are assets acquired must be new depreciable assets or costs incurred in improvement of existing depreciable assets. Additional eligibility criteria include requiring the asset to be located in Australia and principally used in Australia for the purposes of carrying on a business.
An asset is not eligible for full expensing if:
- The capital allowance rules in Div 40 ITAA 1997 do not apply to it (i.e. if it is trading stock or a capital works asset or CGT asset);
- The asset is not used or located in Australia;
- The expenditure is allocated to a low-value pool or software development pool; or
- The expenditure is deductible to the entity or another entity under the primary production depreciation rules in Subdiv 40-F ITAA 1997
Businesses with an aggregated turnover of less than $50 million may also fully expense the cost of second-hand assets acquired from budget time, which are first installed and ready to use by 30 June 2022. For businesses with turnover between $50 million and $500 million, the instant asset write-off up to $150,000 can still be applied to second-hand assets if they are purchased by 31 December 2020.
Furthermore, small business entities with an aggregated turnover of less than $10 million may write off the balance of their general small business pool, irrespective of the balance, at 30 June 2021 and 30 June 2022.
It is important to remember the immediate write off and the full expensing measures are not a free handout. Businesses still need the cash to make the purchase and shouldn’t put themselves under additional financial strain merely to obtain the tax deduction. These measures simply bring forward tax deductions which would have been claimed anyway over time and are not beneficial for businesses who have no tax liability without the additional deduction.
Businesses should contact their accountant prior to making any big decisions around investment. The 2021 financial is on track to eclipse the complexity in completion of the 2020 tax return but it does provide an opportunity for tax practitioners to assist and navigate clients through potentially significant tax savings through careful capital asset investment planning.