Temporary full expensing of depreciating assets

11 May 2021

In brief

As part of the response to the widespread economic impact of COVID-19, the Federal Government announced in the 2020-21 Budget that it will allow a deduction for the full cost of certain depreciating assets acquired and used by eligible businesses. This measure, known as ‘temporary full expensing’, was originally announced to apply to eligible assets acquired from 7.30pm AEDT on 6 October 2020 (2020 Budget time) and first used or installed by 30 June 2022. In the 2021-22 Budget, the Government announced it would extend this for an additional year to 30 June 2023.

Temporary full expensing of the cost of depreciating assets is intended to ‘supercharge’ previous capital allowance concessions by extending access to larger businesses and eliminating the cap on the cost of eligible assets. Businesses that were not eligible for the previous concessions may now be entitled to write off the cost of eligible assets under the new concession.

There are some limitations on entities that can access the concession and the types of assets that are eligible, and this will depend on the size of the business seeking to claim the concession. For example, businesses with annual aggregated turnover of less than A$50 million will be able to claim the cost of second-hand assets, whilst larger businesses will generally not. 

Following amendments passed by Parliament on 10 December 2020, businesses also now have the option to opt out of this measure on an asset-by-asset basis. Businesses which opt out or are ineligible to claim the temporary full expensing concession for certain assets may still be eligible for other concessions including the original ‘instant-asset write-off’ concession and the backing business investment accelerated depreciation measure. For more details on these measures, visit our website for guidance on tax obligations and relief for businesses affected by COVID-19.

In detail

When is an entity eligible for temporary full expensing?

There are a number of conditions that must be met before a taxpayer can access the temporary full expensing concession. In simple terms, the entity’s eligibility threshold is whether:

• the entity meets an aggregated turnover threshold of less than A$5 billion (aggregated turnover test), or 
• if the entity is a company, it meets an alternative threshold test based on the company’s ordinary and statutory income and historical capital expenditure (alternative test).

Aggregated turnover test

Under the aggregated turnover test, the entity must be carrying on a business in the current year and satisfy one of the following tests:

• it carried on a business in the previous income year and the aggregated turnover for the previous income income was less than A$5 billion
• as at the beginning of the current year, it is likely to have less than A$5 billion in aggregated turnover for the current year, provided that it did not have more than A$5 billion in aggregated turnover for both of the previous two income years, or 
• its aggregated turnover for the current year is less than A$5 billion (determined at the end of the current year).

A taxpayer’s aggregated turnover is the sum of the ‘annual turnovers’ of the taxpayer and also those of any entity connected with or affiliated with the taxpayer (excluding amounts derived from dealings between those entities). An entity’s ‘annual turnover’ is the total ‘ordinary income’ that it derives in the income year in the ‘ordinary course of carrying on a business’. ’Ordinary income’ is ‘income according to ordinary concepts’ and bears no relationship to whether the income might be assessable or made exempt under provisions in the Australian tax law or whether the income is included as revenue in an entity’s financial report. For further details on the determination of aggregated turnover, refer to our Tax Alert on aggregated turnover.

Alternative test

An alternative test is available for corporate tax entities seeking to access the temporary full expensing concession. Interestingly, this alternative test does not extend to trusts, super funds or partnerships, other than those that are treated for tax purposes as though they were a company. Specifically, this means that a company with annual aggregated turnover of A$5 billion or more will be able to access the measure if:

• it has 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
• it has invested more than $100 million in certain tangible depreciating assets in the period covering the 2016‑17 to 2018‑19 income years.

Asset eligibility for temporary full expensing

Temporary full expensing is available for eligible assets acquired from 7.30pm AEDT on 6 October 2020 (2020 Budget time) and first used or installed by 30 June 2023. 

Although most new depreciating assets will qualify, there are a number of important exclusions. Broadly, businesses with aggregated turnover of less than A$50m are able to access this concession for a wider range of assets. The exclusions are summarised in general terms in the table below.

As well as allowing a deduction for the full cost of eligible assets acquired and first used or installed during the relevant period, this measure also provides a deduction for any improvements to existing depreciating assets (referred to as ‘second element costs’) between the 2020 Budget time and 30 June 2023 (as announced to be extended in the 2021-22 Budget).

Key considerations

There are a number of key issues that taxpayers should consider before claiming this concession or committing to purchases on the basis that this concession is available. Some of these are highlighted below. 

1. Optionality: Recent amendments have introduced the ability for taxpayers to opt out of this measure on an asset-by-asset basis. There are a number of reasons why a taxpayer may choose not to claim a deduction under this measure - for example, if the entity holding the assets is likely to be sold in the future, to retain the ability to reset the cost of the asset on joining a tax consolidated group (see issue 4 below) or to avoid creating significant tax losses that may not be able to be utilised in future where loss carry back is not available (see issue 5 below).

2. Assessing aggregated turnover: Assessing an entity's aggregated turnover can be a complex exercise as it involves identifying entities connected with or affiliated with the taxpayer, and sourcing information regarding the ordinary income of those entities. Taxpayers should pay close attention to the appropriate test time, which is generally either the prior income year or the current income year. Where there has been a fall in turnover in the current year which results in expected aggregated turnover to be below the A$5billion threshold, it may not be possible to confirm eligibility until the end of the income year. In these circumstances, businesses should do additional work to estimate turnover for the year before investing in any assets where the ability to claim the upfront deduction is critical to the decision making process. 

3. Accessing the alternative test: The alternative test was introduced to improve access to the concession for taxpayers with aggregated turnover of A$5 billion or more. This, however, is limited to companies only (not trusts, partnerships or individuals) and those with a historical track record of substantial investment in tangible depreciating assets. In practice, this limits the alternative test to a small number of Australian taxpayers. 

4. Interaction with tax consolidation provisions: Where a deduction is taken for the cost of an asset under the temporary full expensing measure, this has future implications where the entity holding the asset subsequently joins a tax consolidated group. This is due to a modification to the tax cost setting rules which reduces the asset's tax cost setting amount to its terminating value which will be nil where the cost of the asset was originally claimed under this measure. As such, there can be no 'step-up' for the tax cost of the asset, even in cases where the asset’s market value exceeds the historical full expensing tax claim. Unlike the position with a reduction in tax cost setting amount under other provisions, the amount of the reduction is not re-allocated among other assets. 

5. Interaction with loss rules: Claiming a deduction for the full cost of eligible depreciating assets may result in tax losses. Companies (and other entities taxed like companies) may be eligible to claim a loss carry-back tax offset which effectively provides a refund of tax paid in prior years. The temporary loss carry back rules were announced in the 2020-21 Federal Budget and are intended to complement the temporary full expensing measures. For more information about loss carry back, read our Tax Alert. Taxpayers that are not eligible for loss carry back should be mindful of rules that may limit the ability to recoup tax losses against future taxable income.

6. Who claims the benefit of the deduction? For Australian income tax purposes, the ‘holder’ of a depreciating asset claims the tax depreciation (or capital allowances). In general, the holder of a depreciating asset is the owner of the asset. In genuine commercial lease arrangements (e.g. operating leases and finance leases), in most cases the holder is the lessor. In a standard chattel mortgage or loan arrangement, the holder of the asset is the borrower. However, the holder of a depreciating asset is modified in certain asset financing arrangements, including:

• for luxury car leases, the lessee is deemed to be the holder and claims depreciation deductions based on the luxury car limit; and
• for hire purchase arrangements, the hiree is deemed to be the holder and claims depreciation deductions where the hiree possesses the asset and is reasonably expected to exercise a right that would make the hiree the holder of the depreciating asset.

For asset financing businesses, the choice of asset financing solution will determine who obtains the benefit of the enhanced tax concessions. 

7. How is the benefit claimed? The depreciation deductions under the temporary full expensing measure will be claimed on lodgment of the relevant income tax return. Entities may also wish to consider bringing forward the cash tax benefit of the concession by:

• varying PAYG instalment rates, or
• lodging income tax returns as soon as possible to claim the benefit of the concession and reduce future PAYG instalment rates.

8. Governance/Operational risk issues: There will be a number of system issues and other governance/operational issues to consider when implementing these rules, for example:

• accessing the relevant information to assess asset eligibility (e.g. recording when an asset is installed and ready for use, or if it is second hand)
• setting up the ERP/fixed asset system to apply different tax depreciation rules to different assets 
• potential to apply retrospective adjustments to existing systems (noting that this may need to be done before year end)
• guidance to finance/procurement teams for the treatment of capital additions
• additional year end checks and reconciliations to income tax provision and income tax return processes to confirm correct application of the rules 

9. Clawback for assets not used or located in Australia: The amendments enacted in early December 2020 introduced a balancing adjustment to effectively clawback some or all of the benefit of the upfront deduction in a later income year if the asset ceases to be used primarily for carrying on a business (for example, it is applied for private use), if it is relocated outside of Australia or where the asset was intended to be relocated to Australia for business use but this does not occur. Practically, this means that use of the asset should be monitored for the remainder of its life. Where the balancing adjustment occurs, there is a deemed disposal and reacquisition of the asset for its market value at that time. This means that the market value of the asset will be included in assessable income of the taxpayer at the time of the balancing adjustment, and the taxpayer will then claim normal depreciation on the deemed cost of the reacquired asset if it is used for a taxable purpose.

The takeaway

The temporary full expensing concession for capital investment is intended to stimulate investment in certain capital assets to maintain jobs and economic activity. 

As highlighted above, there are a number of issues that businesses should consider before claiming deductions under this measure and/or making significant investments. The ability to opt out of these measures, coupled with the interactions with the tax consolidation rules and the balancing adjustment for assets not used or located in Australia means that taxpayers need to not only consider their immediate plans for the use of the asset but also future plans for the asset when deciding whether to claim the upfront deduction.

The additional one year for assets to be acquired and installed ready for use that was announced in the 2021-22 Budget is a welcome move as it gives businesses additional time to plan for, purchase, and take delivery of depreciating assets. This has been an issue of concern for some businesses considering an investment in depreciating assets which have long lead times from purchase to installation and use.