The Federal Budget measure allows businesses to fully write-off eligible assets. Just to recap, businesses with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets acquired from 7:30pm AEDT on 6 October 2020 (Budget night) and first used or installed by 30 June 2022.
“Full expensing” in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets. For small- and medium-sized businesses (with aggregated annual turnover of less than $50 million), full expensing also applies to second-hand assets.
Businesses with aggregated annual turnover between $50 million and $500 million can still deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31 December 2020 under the existing instant asset write-off. Also businesses that hold assets eligible for the existing $150,000 instant asset write-off will have an extra six months, until 30 June 2021, to first use or install those assets.
Small businesses (with aggregated annual turnover of less than $10 million) can deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies. The rules that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out will continue to be suspended.
Meeting the required conditions
A number of conditions must be satisfied for assets to be full expensed. First of all the asset must be used in a business. Accordingly the full expensing of assets does not apply to an employee who has purchased a work-related asset. Also no balancing adjustment event must occur to the asset in the current year.
Note also that some assets are excluded such as capital works and assets allocated to a software development pool.
In most circumstances, a depreciating asset is “held” when the taxpayer becomes the legal owner of the asset, which is frequently not at the time of purchase or order. The taxpayer must start to use the asset, or have it installed ready for use, for a taxable purpose in the year (“the current year”) in which the taxpayer wants to write-off 100% of the cost of the asset.
One important point is that when an asset on which full expensing has been claimed is later disposed of for consideration, that the full amount of the consideration will need to be returned as assessable income due to a balancing adjustment event.
So, the new full expensing legislation does not give a taxpayer any extra tax deductions. It just gives them sooner than before.
For most business entities, particularly small businesses, the depreciation recognised for accounting purposes is often equal to that claimed for tax purposes. With assets being able to be fully expensed for tax purposes, it could come about that a business will re-consider whether this is the best accounting policy. The full expensing of assets obviously lowers profits and might, artificially, put a business into a loss situation.
Depending on who uses the financial statements of the business, having a poor accounting result may not be desirable. For example, financiers might prefer to see a better accounting outcome than might result if full expensing of assets is adopted for accounting purposes.
In arm’s length partnerships, a proper accounting for the depreciation of fixed assets may give a more palatable outcome when it comes to distribution of profits. If partners are being admitted or are departing, the business owners may prefer a profit and loss statement that shows a fair depreciation of fixed assets rather than an artificial tax number.
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