Instant asset write-off and accelerated depreciation deductions

27 March 2020

Impact for asset financing businesses

In brief

The Federal Government’s economic response to the spread of the Coronavirus, which was announced on 12 and 22 March 2020, is now enacted with the speedy consideration and passage of the relevant legislation earlier this week.

The Coronavirus Economic Response Package Omnibus Act 2020, one of many of the legislative responses, includes the enhanced tax concessions for capital investment.  The focus of these concessions is to stimulate investment in certain capital assets to maintain jobs and economic activity.

There are two key measures which apply from 12 March 2020 to all businesses with an annual aggregated turnover of up to A$500 million:

• The instant asset write-off - which applies to both new and second-hand depreciating assets which have a cost of less than A$150,000 (up from A$30,000) and includes the cost of additions/improvements to existing assets which have a cost of less than A$150,000. This is a temporary expansion and will only apply to eligible depreciating assets that are first used or installed ready for use from 12 March 2020 up until 30 June 2020.  After this time, in the absence of any further relief, the asset threshold will revert to A$1,000, and the instant write-off will only apply to small businesses with an aggregated turnover of less than A$10 million.
  

• Accelerated depreciation deductions - which applies to all newly acquired depreciating assets which are not eligible for the instant asset writeoff.  This concession will provide an immediate tax deduction of 50 per cent of the cost of the eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost. This measure will apply to eligible new (not second hand) depreciating assets acquired from 12 March 2020 and first used or installed by 30 June 2021. There is no limit to the cost of a depreciating asset that can qualify for this concession, which means it will be particularly relevant for those depreciating assets which are not eligible for the instant asset write-off.

There are several matters for asset financing businesses to consider to work out who can benefit from the enhanced tax concessions for capital investment.

In detail

How do the enhanced tax concessions for capital investment work?

Example 1: Instant asset write-off

Oz Finance Co had aggregated turnover greater than A$10 million but less than A$500 million in the year ended 30 June 2019.

On 24 March 2020 (i.e. on or after 12 March 2020 and before 1 July 2020), Oz Finance Co acquired a motor vehicle for $40,000 and leased it to Daryl’s Logistics business under a standard operating lease.  

Oz Finance Co is able to immediately deduct the cost of the motor vehicle in its income tax return for the year ended 30 June 2020.

Example 2:  Accelerated depreciation deductions

Oz Finance Co had aggregated turnover greater than A$10 million but less than A$500 million in the year ended 30 June 2020.

On 1 July 2020 (i.e. on or after 12 March 2020 and before 1 July 2021).  Oz Finance Co acquires a light commercial vehicle for $160,000 and leases it to Daryl’s Logistics business under a standard operating lease.  The statutory capped effective life for the vehicle is 7.5 years. 

Oz Finance Co is able to immediately deduct:

• $80,000 (i.e. 50 per cent of the asset’s cost) in the year ended 30 June 2021; and

• $21,333 (i.e. 26.67 per cent of the asset’s remaining cost using the diminishing value method) in the year ended 30 June 2021.

The remaining cost is deducted in future years of income under the depreciation rules.

When is an entity eligible?

There are a number of conditions that must be met before an entity can access these new concessions.  Generally, the entity must be carrying on a business in the current year and satisfy one of the following tests:

• have carried on a business in the previous year of income and the aggregated turnover for the previous year of income was less than A$500 million; or

• as at the beginning of the current year it is likely to have less than $500 million in aggregated turnover for the current year, provided that it did not have more than $500 million in aggregated turnover for the prior 2 income years; or 

• the aggregated turnover for the current year is less than A$500 million. 

For the accelerated depreciation deductions, it is also necessary to test aggregated turnover in the year of income that the entity first started to hold the asset as well as in the year that it starts to use the asset or has it installed for use for a taxable purpose.

How is aggregated turnover determined?

Aggregated turnover is the sum of all relevant “annual turnovers” of the taxpayer and also any connected or affiliated entities (excluding amounts derived from dealings between those entities).

Connected or affiliated entities do not need to be Australian residents for tax purposes to be included.  For example, connected entities would include non-resident subsidiaries of the entity or non-resident subsidiaries of the entity’s ultimate parent company.

An entity’s “annual turnover” is the total “ordinary income” that the entity 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.   

As such, not everything will be included in the determination of an entity's annual turnover (e.g. capital gains and income that is not derived in the ordinary course of carrying on a business should be excluded).   For borderline cases, it is strongly recommended that the calculation of aggregated turnover be specifically calculated.

While some asset financiers will have Australian ordinary income of less than A$500 million, overseas connected entities may mean that aggregated annual turnover is greater than A$500 million for the relevant income year.

Where an asset financier’s aggregated turnover exceeds A$500 million it will not be entitled to the benefit of the enhanced tax concessions for capital investments and the financier should consider the type of financing solution available for its customers.

Who claims the benefit of the instant asset write-off and additional depreciation deductions?

It is necessary to determine who claims depreciation deductions in order to determine who benefits from the enhanced tax concessions. 

For Australian income tax purposes, the “holder” of a depreciating asset claims tax depreciation (or capital allowances).

In general, the holder of a depreciating asset is the owner of the asset.  In any genuine commercial lease arrangement (e.g. operating lease and finance lease), in most cases, the holder is the lessor.  In any 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 a 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.  The table below summarises who is eligible to claim depreciation deductions (and therefore potentially eligible to claim the instant asset write-off or accelerated depreciation deductions) for different asset financing solutions.

Accordingly, if an asset financier wishes to pass on the benefit of the enhanced tax concessions to its customers, it will need to offer asset financing by way of a chattel mortgage, business loan, luxury car lease or hire purchase arrangement.

What assets are eligible?

An asset is eligible for the enhanced tax concessions if it is a depreciating asset for tax purposes.  This includes:

• an asset that has a limited effective life and can reasonably be expected to decline in value (other than land or trading stock); and
• certain intangible assets such as software, copyright and patents.

The following assets are also specifically excluded from accelerated depreciation deductions (but not the instant asset write-off):

• where a commitment to the asset was entered into before 12 March 2020; 
• where the asset is a second-hand asset; and
• assets that are not used or located in Australia

Some additional rules apply to intangible assets.

An asset eligible for the instant asset write-off is not eligible for accelerated depreciation deductions.

When must the asset be acquired?

For the instant asset write-off, the asset must be first used or installed ready for use during the period commencing 12 March 2020 and ending on 30 June 2020 (inclusive).

For the accelerated depreciation deductions, an asset is also eligible if:

• the entity started to hold the asset between 12 March 2020 and 30 June 2021 (inclusive); 
• the asset was first used, or installed ready for use for a taxable purpose between 12 March 2020 and 30 June 2021 (inclusive), and
• the acquisition of the asset must not have resulted from a contract entered into prior to 12 March 2020. 

How is the benefit of additional depreciation deductions claimed?

The instant asset write-off and additional depreciation deductions for the relevant income years over the period from 12 March 2020 to 30 June 2021 will be claimed on lodgment of the relevant income tax return.

Entities that apply any of these concessions may also wish to consider:

• Varying PAYG instalment rates to reap the benefits of the enhanced tax concessions early; or

• Lodging income tax returns as soon as possible to claim the benefits of the enhanced tax concessions and reduce future PAYG instalment rates.

What if the holder of the assets incurs tax losses?

If the holder of the assets incurs tax losses for a relevant income year, the entity should be mindful of rules that may limit the ability to recoup losses against future assessable income, including the continuity of ownership test and the business continuity test which apply to companies.

In addition, it is worth noting that deductions for payments for pensions, gratuities, retiring allowances and donations cannot add to, or create, a tax loss.  In a year where many businesses have made donations to support bushfire relief and may have paid gratuities or retiring allowances to staff, it will be necessary to ensure that the benefits of the tax concessions are not lost.

The takeaway

The enhanced tax concessions for capital investment are intended to stimulate investment in certain capital assets to maintain jobs and economic activity.  

There are a number of considerations for asset financing businesses, including:

• When to test eligibility for the concessions;

• How to test aggregated turnover including having regard to connected and affiliated entities;
• Who claims the benefit, including having regard to the most appropriate asset financing solution for customers;
• What assets are eligible;
• When must the asset be acquired; and
• What if the holder of the asset incurs tax losses?

Appropriate consideration of these matters will determine who can benefit from the enhanced tax concessions for capital investment.