Updated on 16 December 2020
Note: Following the presentation of the webinar on this topic on 30 October 2020, the Treasurer made an additional announcement that affects the full expensing of assets.
The legislation to enact the announcement has now been passed by parliament. The responses to the questions below have now been modified to take account of the changes. These changes are contained in Treasury Laws Amendment (2020 Measures No. 6) Act 2020 (“TLA No.6”).
Is full expensing mandatory, or can a business still use Division 40 depreciation if it wants to?
First, it should be understood that, broadly, under the changes that applied from 6 October 2020, full expensing applies to capital allowances claimed for small businesses (Subdivision 328-D ITAA97) and capital allowances claimed under Division 40 ITAA97. Full expensing does not apply to businesses with an aggregated turnover of $5 billion or greater. However, some businesses with an aggregated turnover of $5 billion or greater may be able to obtain the benefit of full expensing following the enactment of TLA No.6.
An entity that has an aggregated turnover of less than $10 million can use the small business entity capital allowance provisions in Subdivision 328-D ITAA97. This is a choice. If that choice has been made, the cost of eligible assets that are first held by the entity after budget time on 6 October 2020 and first used or installed ready for use prior to 1 July 2022 must be taken as a tax deduction in the year that the asset is first used or installed ready for use (Subsection 328-181(2) Income Tax (Transitional Provisions) Act 1997 (“ITTPA”) and subsection 328-180(1) ITAA97). That is, full expensing of the asset is compulsory. The changes made by TLA No.6 do not apply to Subdivision 328-D.
If the choice to use the capital allowance provisions for small businesses has not been made when the business would be eligible to, the business must claim capital allowances under Division 40 ITAA97. If an entity claims capital allowances under Division 40, under the amendments made by TLA No.6, an entity can choose not to fully expense the asset. This choice can be made on an asset by asset basis.
Can a taxpayer use a combination of full expensing and other depreciation methods?
Under the amendments made by TLA No.6, full expensing can be chosen for some assets and “normal” depreciation used for other assets. This choice can be made on an asset by asset basis. However, this choice is only available in respect of depreciation claimed under Division 40 ITAA97. The ability to choose not to full expense an asset does not operate in relation to small business depreciation under Subdivision 328-D.
If a small business that currently does not use the small business entity depreciation concessions uses full expensing, does this mean they are then forced to use the small business entity depreciation concessions, including pooling and writing off of the pool balance?
If a small business chooses not to use small business entity depreciation under Subdivision 328-D, the entity must depreciate its assets for tax purposes under Division 40. If Division 40 depreciation is applicable, this does not mean that the entity is compelled to adopt any of the requirements of the small business depreciation concession in Subdivision 328-D such as pooling.
In this example, what is the depreciation claimed as a tax deduction as at 30 June 2020? The opening balance of the general small business pool as at 1 July 2019 was $200,000. During the year ended 30 June 2020, $10,000 of new assets were purchased. The depreciation claimed is $200,000 x 30% = $60,000 + 100% write-off of $10,000 = $70,000. The balance in the general small business pool at 30 June 2020 is $140,000. Can the $140,000 be written off as at 30 June 2020?
No. Section 328-210 ITAA97 gives a deduction under that section instead of the depreciation deduction calculated under section 328-190 (in the above case that is $60,000, not $70,000) if the amount of the following formula is less than $150,000 but more than zero as at 30 June 2020.
The formula is:
- The pool’s opening balance as at 1 July 2019 ($200,000) +
- Broadly, the cost of assets added to the pool during the year ($Nil) +
- Broadly, the cost of any additions to asset ($Nil) –
- Termination value of assets for which there has been a balancing adjustment ($Nil).
This amount equals $200,000 and is more than $150,000. Accordingly, the depreciation deduction under section 328-190 is $60,000 and not $140,000.
I have a client renting out a warehouse to his business which is run through a company. The client now wants to buy trucks and rent out these to the company. Is there any issue with the client claiming the full amount of the cost of the trucks as an expense if he derives rent (in his own name and with his own ABN) from the company in relation to the use of the trucks?
The key issue is whether your (individual) client is conducting a business as this is necessary for the full expensing of assets under both Division 40 and Subdivision 328-D. Unfortunately, there is not a straightforward answer. It will depend on the facts.
Note that deductions cannot be claimed for an asset under Subdivision 328-D if the asset is being or might reasonably be expected to be let predominantly on a “depreciating asset lease”. This is an agreement under which the entity (in this case the individual) that holds the depreciating asset grants a right to use the asset to another entity. However, a depreciating asset lease does not include a hire purchase agreement or a short-term hire agreement.
Does full expensing apply to second hand assets?
For small business capital allowances (Subdivision 328-D), and entities with an aggregated turnover of less than $50 million, assuming the asset is first held after budget time on 6 October 2020, full expensing does apply to second hand assets. For an entity with an aggregated turnover of $50 million, or greater, full expensing of second-hand assets is only available in limited circumstances.
If a business has purchased an asset costing more than $30,000 and, due to the time it was first used or installed ready for use, it is being depreciated, can the balance of the asset now be written off?
If this is a small business (Subdivision 328-D) and at 1 July 2020 there was still a balance in the general small business pool that included this asset, the opening balance of the pool (among other things) can be written off as at 30 June 2021.
As at 30 June 2021, is the entire pool balance written off no matter the value or does the value have to be less than $150,000 at that date for it to be fully written off? Is it compulsory to write-off the balance of the pool as at 30 June 2021?
Effectively, the entire pool balance will be written off as at 30 June 2021 if it is more than zero. This is compulsory.
What is the position in relation to full expensing where there are fixtures and leasehold improvements? If I rent premises and refurbish them, is that covered by the new write-off rules or are they still subject to the old rules requiring depreciation over a long time?
The first point is that full expensing of capital improvements, which are depreciated under Division 43, is not permitted. Some leasehold improvements could well be capital improvements. With other assets, if they are normal depreciable assets, it is quite possible that full expensing of assets could apply. If you are renting premises, there will need to be a business being conducted. Rental activities are often not treated as a business.
A motor vehicle is purchased for $80,000 and is capitalised on the balance sheet. For tax purposes, the cost of the vehicle up to the car limit ($59,136) is written off. What happens to the $20,864 difference? Does it just stay on the balance sheet?
If you are treating your accounting depreciation exactly the same as tax depreciation, the $20,864 would remain on the balance sheet. The amount will stay there until the vehicle is sold. However, accountants should now be considering whether tax depreciation is an appropriate way to account for depreciation in the financial statements of an entity. With full expensing of assets, serious consideration should be given to adopting a policy of calculating depreciation for accounting purposes consistent with the accounting standards. Full expensing of assets will give a distorted (poorer) accounting result.
A motor vehicle is purchased by a small business entity for $100,000 and therefore costs more than the car limit ($59,136). It is estimated that the business use of the car will be 80%. What are the full expensing implications?
The “cost” of the car will be limited to $59,136. Under section 328-180 ITAA97, the taxable purpose proportion of the adjustable value is deducted. In this case, this will be 80% of $59,136 = $47,308.80. The remaining proportion of the cost ($52,691.20) is not dealt with under the tax legislation. If you are depreciating assets using tax depreciation, this amount would remain on the balance sheet until the car was eventually disposed.
When an item of plant is purchased using a chattel mortgage, does the cost of the item become available for deduction when the finance contract is settled, and the item of plant is delivered?
A chattel mortgage gives the owner of the asset legal ownership from the start of the ownership contract. In terms of the tax legislation, an asset is held by the owner, or the legal owner if there is both a legal and equitable owner (section 40-40 ITAA97). For the full expensing law to apply to an asset, it must be first held after budget time on 6 October 2020. Therefore, the deduction is available when the taxpayer becomes the legal owner of the asset and the asset starts to be used or is installed ready for use.
When the plant is delivered, it will usually be the case that the taxpayer is the owner/holder of the asset. However, until it is installed ready for use, no deduction can be claimed.
If a business has a turnover of between $10m to $50m, can it become a small business entity in the year ending 30 June 2021 and write off the full balance of the small business pool at 30 June 2021?
No. Although there are some changed rules in relation to the ability of a business with a turnover of between $10 million and $50 million to access certain small business concessions, this does not mean that the small business capital allowance concessions are being extended to these businesses. The general small business pool for capital allowance purposes is only applicable to businesses with an aggregated turnover of less than $10 million.
Assume an individual purchases an asset and uses it to partly produce assessable income as an employee and also to partly produce assessable income as a small business. What is the position in relation to the full expensing of the asset?
This raises a somewhat intriguing issue. Section 328-175(1) ITAA97 states that you can choose to calculate your deductions …under (Subdivision 328-D) instead of under Division 40
for an income year for all the depreciating assets that you hold
if you are a small business entity for the income year.
Those that drafted the small business capital allowance provisions (Subdivision 328-D) seem to have done so on the basis that if a small business entity owned any depreciable assets that those assets would be used in the small business entity (including as an individual). There may be use of the asset that was not for income producing purposes. However, the legislation does not seem to contemplate the use of an asset by an individual for the earning of income both as a small business and an employee.
The strict reading of section 328-175 states that if you are a small business and you choose to use Subdivision 328-D to calculate capital allowances for your depreciating assets then:
- That choice applies to all of the depreciating assets you hold. It does not seem to matter whether those assets are used in the small business or not – although that does seem to be an illogical outcome.
- The assets can be fully depreciated under Subdivision 328-D as long as the asset is used 100% for a taxable purpose. The legislation does not specify that the assessable income to be earned from the asset must come from the small business entity.
- If you choose to use Subdivision 328-D, you cannot use Division 40 to depreciate the asset. This would preclude any depreciation to be taken as an employee.
So, on the strict reading of Subdivision 328-D, if the asset will be used 100% of the time to generate assessable income, the whole of the cost of the asset can be dealt with under Subdivision 328-D even though part of the use is for the production of assessable income by an employee. Accordingly, the cost of the asset could be claimed totally under section 328-180 if held for the first time after budget time on 6 October 2020.
This conclusion does seem at odds with common sense but it seems to be the outcome the legislation gives you. We have been unable to find any commentary on this point on the ATO website. If any person reading this response has an experience with this issue, please contact Tax & Super Australia.
If an entity is put into tax losses by fully expensing assets, what are the implications of having these losses?
If the entity is a corporate tax entity (including a company), the losses may be able to be carried back to as early as the year ended 30 June 2019. A refundable tax offset may be available.
If the entity is not a corporate tax entity or is a corporate tax entity and chooses not to carry back losses (or cannot carry back losses), the losses may be carried forward to be taken as a deduction against future income, in usual circumstances.
Are there any implications in relation to CGT event E4?
CGT event E4 should be considered whenever a trustee of a trust makes a payment to a beneficiary of the trust in respect of a unit or interest held in the trust and some or all of the payment is not included in the beneficiary’s assessable income. If CGT event E4 has operation, a capital gain can accrue to the beneficiary or the beneficiary can suffer a reduction in the cost base of the beneficiary’s interest in the trust.
With the advent of full expensing of depreciable assets for tax purposes, the likelihood of this incurring will increase where the accounting or trust law depreciation is different from (and less than) the tax depreciation (i.e. the full expensing of depreciable assets). There are a number of exclusions of situations where CGT event E4 will not operate but a difference between trust law and tax depreciation is not one of them.
If Division 40 depreciation is being used and there is a low value pool, do assets costing less than $1,000 have to be added to this pool or can they be expensed immediately?
Under section 40-425 ITAA97, adding an asset to a low value pool was, and still is, a choice. There has never been any compulsion to add an asset that cost less than $1,000 to a low value pool. If an asset costs less than $1,000 and all of the relevant conditions are met, the asset can be fully expensed.
Is the instant asset write-off available to entities with an aggregated turnover of less than $500 million or $5 billion?
Are solar panels for a commercial building that is rented to tenants able to be fully expensed?
Solar photovoltaic electricity generation system assets are given an effective life of 20 years by the ATO. Accordingly, such assets are considered to be eligible depreciating assets for the purposes of the full expensing legislation.
The key issue is whether a business is being conducted by the entity that owns the building as only businesses are able to claim full expensing of depreciation. This will depend on the facts.
If a motor vehicle costs $100,000 and, therefore, only $59,136 is claimed as a tax deduction under the full expensing rules, when the vehicle is sold, what happens to the $40,864 that has not been deducted?
Effectively, the $40,864 is not dealt with under the tax system. The car is deemed to cost $59,136 and when it is sold, the sale proceeds are adjusted downwards to cater for this.
When a car is sold (as defined) to which the car limit (sometimes called the luxury car limit) applies, section 40-325 has application to reduce the “termination value” of the car. For example, assume that the above-mentioned vehicle was sold for $50,000 (GST exclusive). The termination value of the car (the sale proceeds) is adjusted to $29,568. This is $50,000 x ($59,136/$100,000). If small business depreciation is being used and the cost of the vehicle was added to the general small business pool, $29,568 would be subtracted from the pool. If this meant the pool had a negative balance, the negative balance would be returned as assessable income and the pool balance would be set to zero.
Also note that a capital gain or a capital loss made from a “car, motor cycle or similar vehicle” is disregarded under section 118-5 ITAA97.
Please confirm that any business that has a turnover below $5 billion can fully expense an asset. We are a small business that does not use the small business depreciation concession. Can such a business fully expense a second hand asset?
If the turnover of the business is less than $10 million and it does not choose to use small business depreciation, the depreciation (capital allowances) is calculated using Division 40 ITAA97. This means that full expensing of assets can apply to the business and that full expensing can apply to second hand assets. It is only when a business has turnover greater than $50 million that second hand assets cannot be fully expensed, except in limited circumstances.
I assume that when our clients come to sell/trade in these assets in a few years, they are going to get the unpleasant surprise that they can’t deduct the sale/trade price off the general small business pool balance and will be assessed on the full sale/trade-in price?
This question highlights the important point that the full expensing of assets is a timing difference. Depreciation deductions have been accelerated as far as they can be. However, there has been no change to the law in relation to when the asset is disposed. That is, the normal balancing adjustment provisions will have application and the amount that has been full expensed will be returned as assessable income to the extent of the sale price (termination value of the asset).
Where small business depreciation has been chosen, fully expensed assets are not actually added to the general small business pool. They will be deducted outright under section 328-180 ITAA97. When such an asset is sold, the sale proceeds (termination value) is included in the assessable income under subsection 328-215(4) ITAA97.
Can a taxpayer elect to leave the small business depreciation rules and adopt the normal depreciation rules to avoid having to instantly write-off large purchases?
A taxpayer can choose to cease using small business depreciation in relation to all new assets it purchases in an income year (section 328-175 ITAA97). The assets that have already been added to the general small business pool must remain there and be depreciated in accordance with the small business depreciation rules (section 328-220 ITAA97).
If a taxpayer chooses to cease using small business depreciation, the newly acquired assets must be depreciated under Division 40. Under this division, for applicable assets, taxpayers have a choice as to whether assets are fully expensed or not under the changes made by TLA No.6.
Can an entity with a turnover of more than $10 million elect to use the small business depreciation rules and transfer existing assets to a general small business pool and then write off the pool balance if the value is less than $150,000?
No. The entity must be a small business entity to use the small business depreciation rules.
There have been recent changes that will permit businesses with a turnover of between $10 million and $50 million to use some of the small business tax concessions. The capital allowance provisions are not one of the concessions that such businesses will be able to use.
If an entity chooses to exit the small business depreciation concessions in the year ending 30 June 2021, will they still have to wait 5 years before re-entering?
No. There is a rule in subsection 328-175(10) that prevents an entity re-entering the small business depreciation regime within 5 years of choosing not to use the rules. However, the operation of this subsection has been put in abeyance until 30 June 2022.