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  • Temporary full expensing

    Businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets. Corporate tax entities unable to meet the $5 billion turnover test may still be eligible for temporary full expensing under the alternative income test. The eligible new assets must be first held, and first used or installed ready for use for a taxable purpose, between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

    For businesses with an aggregated turnover of less than $50 million, temporary full expensing also applies to the business portion of eligible second-hand depreciating assets.

    Businesses can also immediately deduct the business portion of the cost of improvements to eligible depreciating assets (and to assets acquired before 7.30pm AEDT on 6 October 2020 that would otherwise be eligible assets) if those costs are incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

    You can make a choice to opt-out of temporary full expensing for an income year on an asset-by-asset basis if you are not using the simplified depreciation rules.

    If you are a small business that chooses to use the simplified depreciation rules, you apply the temporary full expensing rules with some modifications. This includes deducting the balance of your small business pool at the end of an income year ending between 6 October 2020 and 30 June 2022. See Small business entities using the simplified depreciation rules.

    For schemes and behaviours that attract our attention, refer to Economic stimulus measures – compliance and integrity.

    Interaction of tax depreciation incentives

    Eligible businesses may want to know which tax depreciation incentive is right for them.

    We have prepared a high-level snapshot to help you work out how temporary full expensing, backing business investment or instant asset write-off may apply to you.

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    Eligible businesses

    Businesses can access temporary full expensing if their aggregated turnover is less than $5 billion.

    The rules for calculating aggregated turnover are the same as those used for the small business entity concessions. Your aggregated turnover may include the annual turnover of other business entities, in addition to your own annual turnover.

    Corporate tax entities that do not meet the $5 billion aggregated turnover test can access temporary full expensing if they satisfy the alternative income test.

    Businesses can claim the deduction when lodging their 2020–21 or 2021–22 tax return (as applicable).

    See also:

    Eligible assets

    To be eligible for temporary full expensing, the depreciating asset must be:

    • new or second-hand (if it is a second-hand asset, your aggregated turnover is below $50 million)
    • first held by you at or after 7.30pm AEDT on 6 October 2020
    • first used or installed ready for use by you for a taxable purpose (such as a business purpose) between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

    Exclusions

    Eligible assets do not include:

    • assets allocated to a low-value pool or a software development pool
    • certain primary production assets (water facilities, fencing, horticultural plants or fodder storage assets), unless you are a small business entity who chooses to use the simplified depreciation rules to these assets
    • buildings and other capital works for which you can deduct amounts under Division 43
    • assets that either    
      • will never be located in Australia
      • will not be used principally in Australia for the principal purpose of carrying on a business.
       

    If your business has an aggregated turnover of $50 million or more, you are excluded from immediately deducting the cost of an eligible asset that is:

    • a second-hand asset
    • an asset you entered into a commitment to hold, construct or use before 7.30pm AEDT on 6 October 2020.

    Additional exclusions apply for corporate tax entities who are eligible for temporary full expensing only through applying the alternative income test. If your depreciating asset is not eligible for temporary full expensing, or you have chosen not to apply temporary full expensing to the asset for a particular income year, other depreciation provisions such as instant asset write-off or backing business investment – accelerated depreciation may apply.

    Improvements

    As well as claiming an immediate deduction for the business portion of the cost of an eligible asset, you can also claim an immediate deduction for the business portion of the cost of any improvements to an eligible asset if it is incurred before 30 June 2022.

    You can also claim for improvements to existing assets. Existing assets are assets that would be eligible assets except that you held them before 7.30pm AEDT on 6 October 2020. You cannot claim the acquisition cost of existing assets under temporary full expensing. However, you can claim an immediate deduction for the business portion of the cost of improvements incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

    If your business has an aggregated turnover of $50 million or more, you can immediately deduct the business portion of the cost of improvements to an asset that would otherwise be excluded because it is either:

    • a second-hand asset
    • an asset you entered into a commitment to hold, construct or use before 7.30pm AEDT on 6 October 2020.

    Working out your deduction

    You claim a deduction for the cost of an asset in the income year in which you start to use the asset, or have it installed ready for use for a taxable purpose. For an improvement cost, you claim a deduction in the income year you incurred that cost.

    However, you reduce your deduction to the extent you use the asset for a non-taxable purpose (for example, private use).

    There is no general limit on the cost of eligible assets to which you can apply temporary full expensing, but there may be specific cost limits on certain assets, such as passenger vehicles to which the car limit may apply.

    Balancing adjustment event

    If you cease to hold or use an asset, a balancing adjustment event may occur. If a balancing adjustment event happens to an eligible asset in the same income year as when you first used the asset for a taxable purpose, and you have not chosen to use the simplified depreciation rules, you cannot deduct the cost of the asset (including costs of improvements) under temporary full expensing.

    You also cannot deduct the costs of improvements under temporary full expensing if a balancing adjustment event happens in the income year you incurred those costs.

    Example 1: balancing adjustment event happening in same year as asset first used

    Julie operates a hairdressing salon as a sole trader and the business has an aggregated turnover of $380,000 for the 2020–21 income year. Julie does not use the simplified deprecation rules.

    On 7 October 2020 Julie purchased a $1,800 shampoo station unit and immediately uses it wholly for business purposes. Three weeks later, she realises that the shampoo station unit is not fit for purpose. On 1 November 2020, Julie sold the shampoo station unit for $1,500. The sale gives rise to a balancing adjustment event in the 2020–21 income year which is the same income year that the shampoo station unit is held and used by Julie. Julie cannot deduct the cost of the shampoo station unit in the 2020–21 income year under temporary full expensing.

    End of example

    If a balancing adjustment event occurs in a year after you claimed temporary full expensing for an asset (on either the cost of acquisition or improvements), you need to calculate a balancing adjustment amount and include it in your income tax return.

    In a year after you claim, a balancing adjustment event will also occur under temporary full expensing when it becomes not reasonable to conclude that either:

    • the asset will be used principally in Australia for the principal purpose of carrying on a business
    • the asset will be located in Australia.

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    Eligible new assets

    Assets that start to be used for a taxable purpose in the same income year as when you first held the asset

    If you start to hold an eligible asset in an income year and first use the asset, or have it installed ready for use, for a taxable purpose in the same income year, you deduct the business portion of the cost of the asset in that year. The cost of the asset includes costs of any improvements incurred in that year.

    Assets that start to be used for a taxable purpose in a later income year to when you first held the asset

    If you only start to use the asset, or have it installed ready for use, for a taxable purpose in an income year that is later than the year when you started to hold the asset, you deduct in that later income year the sum of:

    • the asset's opening adjustable value for that later income year (if you started to use the asset for a non-taxable purpose in the previous income year, this is the cost remaining after the previous year’s decline in value)
    • the costs of improvements incurred in that later income year.

    You cannot deduct an amount included in the asset's cost after 30 June 2022 under temporary full expensing.

    Example 2: costs of acquisition and improvements of a new asset

    Healthy Foods Alpha Trust has an aggregated turnover of $570,000 for both 2020–21 and 2021–22 income years. Healthy Foods Alpha Trust does not choose to use the simplified depreciation rules. On 30 May 2021, Healthy Foods Alpha Trust purchases a new commercial food processor for $25,000, and immediately uses it wholly for business purposes.

    On 28 August 2021, Healthy Foods Alpha Trust incurs costs of $5,000 to modify and improve the capacity of the food processor.

    As Healthy Foods Alpha Trust has acquired and used the food processor wholly for business purposes after 6 October 2020 and its aggregated turnover is under $5 billion for both income years, it deducts the full cost of the commercial food processor (that is, $25,000) in its 2020–21 tax return and the cost of improvements (that is, $5,000) in its 2021–22 tax return.

    End of example

     

    Example 3: a new asset first used for a taxable purpose in a later income year

    Jason operates a business as a sole trader. The business has an aggregated turnover of $300,000 for the 2021–22 income year. Jason has not chosen to use the simplified depreciation rules. Jason purchases a new security system on 30 June 2021 for $8,000 and installs it on his business premises on 1 August 2021. Jason uses the security system wholly for business purposes.

    Jason has acquired and installed the security system after 6 October 2020. As the security system is only ready for use after installation on 1 August 2021, Jason deducts the full cost of the security system (that is, $8,000) in his 2021–22 tax return.

    End of example

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    Eligible second-hand assets

    If your aggregated turnover is less than $50 million and you start to hold and use an eligible second-hand asset, you deduct the business portion of the cost of that asset. The cost of the asset includes costs of improvements incurred in the same income year.

    Example 4: business with a turnover of less than $50 million acquires a second-hand asset

    S2Go Pty Ltd has an aggregated turnover of $250,000 in the 2020–21 income year and has not chosen to use the simplified depreciation rules. On 5 April 2021, S2Go Pty Ltd acquires a second-hand photocopier for $2,000 and immediately begins using it wholly for business purposes.

    For the 2020–21 income year, S2Go Pty Ltd deducts the full cost of the photocopier (that is, $2,000) because its aggregated turnover is less than $50 million and the second-hand photocopier is acquired after 6 October 2020.

    End of example

     

    Example 5: business with a turnover of more than $50 million acquires and improves a second-hand asset

    Xtra Duty Pty Ltd has an aggregated turnover of $60 million in the 2019–20 and 2020–21 income years. On 1 January 2021, Xtra Duty Pty Ltd acquires a second-hand excavator for $180,000 and immediately begins using it wholly for business purposes.

    On 2 February 2021, Xtra Duty Pty Ltd incurs costs of $9,500 to improve the excavator.

    Xtra Duty Pty Ltd cannot immediately work out the decline in value on the first element of cost of the excavator ($180,000) under:

    • temporary full expensing because of the exclusion of second-hand assets for entities with an aggregated turnover of $50 million or more
    • instant asset write-off because the cost exceeds the threshold of $150,000 and it is acquired after 31 December 2020
    • backing business investment - accelerated depreciation which is not available for second-hand assets.

    However, Xtra Duty Pty Ltd still works out its depreciation deduction for the 2020–21 income year under the temporary full expensing rules because some part of the asset's cost is eligible for temporary full expensing (the improvement cost of $9,500). The amount of its deduction is the sum of:

    • the excavator's decline in value on the first element of cost ($180,000) that would be worked out under the general depreciation rules
    • the improvement costs of $9,500 incurred after 6 October 2020 (eligible under temporary full expensing).
    End of example

    Existing assets

    For existing assets, you can claim an immediate deduction for the business portion of the cost of improvements incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

    If you incur costs of improvements to an existing asset in an income year, you deduct the costs of improvements in that income year if you either:

    • start to use the asset or have it installed ready for use for a taxable purpose in that income year
    • started to use the asset or had it installed ready for use for a taxable purpose in an earlier income year.

    If you have deducted the first element of an asset's cost under the instant asset write-off or backing business investment – accelerated depreciation in an earlier income year, you can still deduct the improvement costs of that asset in a later year under temporary full expensing.

    Example 6: applying different depreciation rules to acquisition and improvement costs

    Mary and Luke operate a car wash business through the Unicorn Trading Trust which has an aggregated turnover of $16 million in each of the 2020–21 and 2021–22 income years. Unicorn Trading Trust acquires a new water recycling system for $50,000 on 8 September 2020 and immediately begins using it wholly for business purposes. On 16 August 2021, Unicorn Trading Trust incurs costs of $2,500 to improve the water recycling system.

    Unicorn Trading Trust first held the water recycling system before 6 October 2020 so it cannot deduct the asset’s cost (that is, $50,000) under the temporary full expensing rules. However, it can deduct the $50,000 cost under the instant asset write-off in its 2020–21 tax return because its aggregated turnover is less than $50 million, the asset costs less than the relevant threshold of $150,000 and the asset is acquired before 31 December 2020.

    Unicorn Trading Trust can deduct the costs of the improvements ($2,500) to the water recycling system under temporary full expensing in its 2021–22 tax return.

    End of example

     

    Example 7: costs of improvements incurred in a later income year to when the asset is first used

    B2 Corporation has an aggregated turnover of $510 million for the 2021–22 income year. B2 Corporation acquires a truck in the 2017–18 income year for $80,000 and immediately uses it wholly for business purposes. On 2 November 2021, B2 Corporations incurs costs of $14,000 to improve the truck.

    B2 Corporation started to hold the truck before 6 October 2020 so it cannot deduct the truck’s cost (that is, $80,000) under the temporary full expensing rules.

    B2 Corporation works out its depreciation deduction for the 2021–22 income year under the temporary full expensing rules because some part of the asset’s cost is eligible for temporary full expensing (the improvement cost of $14,000 was incurred after 6 October 2020).

    The depreciation deduction for the 2021–22 income year is the sum of:

    • the asset's decline in value (disregarding the cost of improvements) on the costs incurred before 6 October 2020 ($80,000), worked out under the general depreciation rules
    • $14,000, being the cost of improvement incurred after 6 October 2020.
    End of example

    Alternative income test

    Corporate tax entities unable to meet the $5 billion turnover test can still be eligible for temporary full expensing if both:

    • their total ordinary income and statutory income (excluding non-assessable non-exempt income) is less than $5 billion for the 2018–19 income year (or for the 2019–20 income year if that year ends on or before 6 October 2020)
    • the total cost of certain depreciating assets (including cost of improvements) held and first used, or first installed ready for use, for a taxable purpose in the 2016–17, 2017–18 and 2018–19 income years (combined) exceeds $100 million.

    For the purpose of determining whether the total cost of depreciating assets exceeds $100 million, you do not take into account assets that are:

    • intangible assets
    • depreciating assets if there is no reasonable conclusion they would be used principally in Australia for the principal purpose of carrying on a business or ever be located in Australia.

    Assets excluded from temporary full expensing if applying the alternative income test

    If you are only eligible for temporary full expensing under the alternative income test, a deduction cannot be claimed under temporary full expensing (on either the cost of acquisition or improvements) for the usual excluded assets in addition to the following assets:

    • intangible assets
    • assets previously held by your associates
    • assets available for use, at any time in the income year, by your associates or entities that are foreign residents.

    Opting out

    You can make a choice to opt-out of temporary full expensing for an income year on an asset-by-asset basis if you are not using the simplified depreciation rules. However, you must notify us in an approved form that you have chosen not to apply temporary full expensing to the asset for an applicable income year. The choice is unchangeable and you must notify us by the day you lodge your income tax return for the income year to which the choice relates.

    Example 8: Choice to not apply temporary full expensing in one year and temporary full expensing applying in a later year to same asset

    Bill operates a demolition business as a sole trader and the business has an aggregated turnover of $1 million for the 2020–21 and 2021–22 income years. Bill does not use the simplified depreciation rules.

    On 10 January 2021 Bill purchases a second-hand bulldozer for $200,500 and immediately uses it wholly for business purposes. The bulldozer qualifies for temporary full expensing in the 2020–21 income year. However, Bill chooses to opt out of applying temporary full expensing to the bulldozer in his 2020–21 income tax return. Bill will work out the decline in value of the second-hand bulldozer under the general depreciation rules.

    On 7 August 2021 Bill installs an alarm in the bulldozer for $1,200. The cost of this improvement to the bulldozer is eligible for temporary full expensing in the 2021–22 income year. Although Bill opted out of applying temporary full expensing to the bulldozer on the acquisition cost in the 2020–21 income year, if he does not opt out of applying temporary full expensing to the bulldozer in his 2021–22 income tax return, he must work out the bulldozer’s decline in value under the temporary full expensing rules for the 2021–22 income year as the sum of:

    • the improvement cost of $1,200 incurred during the temporary full expensing period
    • the bulldozer’s decline in value (disregarding the improvement cost) on the acquisition cost of $200,500 that would be worked out under the general depreciation rules.
    End of example

    Small business entities using the simplified depreciation rules

    If you are a small business entity choosing to use the simplified depreciation rules, temporary full expensing rules with some modifications apply.

    Eligible assets

    You immediately deduct the business portion of the asset's cost for assets you start to hold, and first use (or have installed ready for use) for a taxable purpose from 7.30pm (AEDT) on 6 October 2020 to 30 June 2022.

    No threshold applies to the cost of the asset.

    You cannot deduct the business portion of an asset's cost where the asset is excluded from the simplified depreciation rules. The general temporary full expensing rules may apply to these assets.

    Working out your deduction

    You cannot opt out of temporary full expensing for assets that the simplified depreciation rules apply to. You are required to immediately deduct the business portion of the asset's cost for assets you start to hold, and first use (or have installed ready for use) for a taxable purpose from 7.30pm (AEDT) on 6 October 2020 to 30 June 2022. These assets are not added to your small business pool.

    You also deduct the balance of the small business pool at the end of an income year ending between 6 October 2020 and 30 June 2022.

    The pool's closing balance for the income year is zero after full expensing.

    Improvements

    You can deduct the business portion of the costs of improvements made to an asset from 7.30pm (AEDT) on 6 October 2020 to 30 June 2022.

    Lock out rules relaxed

    The 'lock out' rules that prevented small business entities from accessing the simplified depreciation regime for five years if they opt out of the regime are suspended until 30 June 2022. This allows small business entities to take advantage of temporary full expensing.

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    How to claim

    If your income year ends on 30 June, deductions under temporary full expensing are only available in the 2020–21 and 2021–22 income years.

    You can choose to opt-out of temporary full expensing for an income year on an asset-by-asset basis and claim a deduction using other depreciation rules. However, you must notify us in your income tax return that you have chosen not to apply temporary full expensing to the asset. The choice is unchangeable and you must notify us by the day you lodge your income tax return for the income year to which the choice relates.

    If your 2020–21 income year ends:

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    Information needed to claim

    To claim a temporary full expensing deduction you will need to give information in additional labels that will be included in the 2020-21 and 2021-22 income tax return forms.

    This additional information relates to your eligibility and your claim and will assist with our administration of the temporary full expensing measure. In addition, it will also help inform future services and initiatives for business.

    The information that you will provide through additional labels in the tax return form includes:

    • whether you are making a choice to opt out of temporary full expensing for some or all of your eligible assets
    • the number of assets you are opting out for (if applicable)
    • the costs of assets you are opting out for (if applicable)
    • the total amount of your temporary full expensing deduction
    • the number of assets you are claiming temporary full expensing for
    • whether you are using the alternative income test (corporate entities)
    • information about your aggregated turnover.

    If you are submitting the 2020–21 early balancer substituted accounting period claim form, we have also asked you to provide us with this information.

    Loss carry back tax offset

    You might make a tax loss in an income year as a result of claiming an immediate deduction under temporary full expensing. If you are a corporate tax entity, instead of carrying the tax loss forward and using it to offset your future income, you can consider if you are eligible for a refundable tax offset under loss carry back.

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    Last modified: 26 May 2021QC 64428