R&D implications of the TFE regime

In brief

Temporary Full Expensing – or ‘TFE’ - was introduced in October 2020 as an economic stimulus measure during the COVID-19 pandemic. It enabled eligible entities to immediately deduct the business portion of the cost of eligible new depreciating assets. For entities with aggregated turnover below $50 million, this extended to second-hand assets. ATO guidance broadly indicates that if an asset was used for research and development (R&D), then it may also be possible to obtain an R&D notional deduction for the proportion of the asset that was used for R&D. The TFE regime ended on 30 June 2023, but if a company bought (or built) a tangible  depreciating asset and it was installed and used for one or more R&D activities before 30 June 2023, then there is the potential to receive an R&D offset associated with the cost of the asset. Companies lodging tax returns and R&D claims should contemplate whether this applies to them. 

In detail

The TFE regime was open to entities with annual aggregated turnover below $5 billion, for depreciating assets first held on or after 6 October 2020, and first used (or installed ready for use) on or before 30 June 2023. Companies currently preparing tax returns for the year ended 30 June 2023 should be considering this, irrespective of R&D claims. 

Such assets may also attract an R&D notional deduction for the proportion that the asset was used for a registered core or supporting R&D activity in the year ended 30 June 2023. For this purpose, Subdivision 355-E of the Income Tax Assessment Act 1997 (ITAA 1997) substitutes the requirement for the asset to be used ‘for a taxable purpose’ to ‘for the purpose of conducting one or more of the R&D activities’. As such, the date on which the asset was first ‘used or installed ready to use’ relates to when the asset was first used (or installed ready for use) as part of an R&D activity – for example, if a company undertook R&D for the purpose of creating a new type of machine for its own use, then the relevant date might be the date that a production trial took place. 

While offering a potential benefit for claimants of both the refundable and non-refundable R&D offset, the TFE regime can be particularly attractive for businesses eligible for the refundable R&D tax offset. If a company eligible for the refundable offset bought (or built) a tangible depreciating asset, and it was installed and used for an R&D activity on or before 30 June 2023, then the company can receive a gross benefit of 43.5% of the R&D portion of the asset’s decline in value. Using the above example of a company creating a new machine, this could result in cash refund of 43.5% of the cost of developing the machine (assuming the company has sufficient tax losses and noting that the company would also lose any ordinary tax deductions relating to the development). 

For non-refundable claimants, utilising TFE alongside R&D can allow the R&D entity to gain the R&D offset against as much as 100% of the cost of the tangible depreciating asset, instead of just the decline in value for the year. 

If a company intends to access the R&D Tax Incentive for the R&D proportion of an asset, documentation to substantiate that proportion is required, as well as to support the conditions for accessing the TFE regime. The ATO expects R&D claimants to be able to prove the proportion for which the asset was used for one or more R&D activities in the income year, and in the event of an audit or review, will request documentary evidence.

Summary

The TFE regime ended on 30 June 2023, but businesses calculating depreciation under Division 40 of the ITAA 1997 can claim immediate deductions for assets delivered, installed and ready for use up to this date. For eligible entities, tax returns for the period ended to 30 June 2023 can crystallise an uplifted decline in value notional deduction and a potential cash refund for assets used for registered R&D activities before this date. 

If you would like to discuss any of the topics mentioned above, please reach out to one of the R&D and Government Incentives team members.