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  • Working out your deduction

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    How to calculate 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.

    Non-taxable use

    You must reduce your deduction by the extent to which the asset is used for a non-taxable purpose (for example, private use).

    Limits

    There is no general limit on the cost of eligible assets to which you can apply temporary full expensing. However, 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 stop holding or using an asset, a balancing adjustment event may occur. You may find that 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. If so, and you have not chosen to use the simplified depreciation rules, you can't deduct the cost of the asset (including costs of improvements) under temporary full expensing.

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

    Example: balancing adjustment event happening in same year as asset first used for a taxable purpose

    Julie operates a hairdressing salon as a sole trader. Her 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 purchases 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 sells the shampoo station unit for $1,500. The sale gives rise to a balancing adjustment event in the 2020–21 income year. This is the same income year that the shampoo station unit is first used by Julie. Julie can't deduct the cost of the shampoo station unit in the 2020–21 income year under temporary full expensing.

    End of example

    A balancing adjustment event may occur in a year after you claimed temporary full expensing for an asset, on either the cost of acquisition or improvements. If so, you need to calculate a balancing adjustment amount and include it in your 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 the asset will be either:

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

    See also:

    Eligible new assets

    The amount you deduct for your eligible new asset varies depending on whether you start to use it (or have it installed ready for use) for a taxable purpose in an income year that is:

    • the same year as when you started to hold it
    • later than the year when you started to hold it.

    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)
    • costs of improvements incurred in that later income year.

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

    Example: 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. It is immediately used 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.

    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. So it deducts the:

    • full cost of the commercial food processor (that is, $25,000) in its 2020–21 tax return
    • cost of improvements (that is, $5,000) in its 2021–22 tax return.
    End of example

     

    Example: 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

    See also:

    Next step:

    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: 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
    • the second-hand photocopier is acquired after 6 October 2020.
    End of example

     

    Example: 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 can't 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. This is 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
    • improvement costs of $9,500 incurred after 6 October 2020 (eligible under temporary full expensing).
    End of example

    Next step:

    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.

    You may 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. If so, you can still deduct the improvement costs of that asset in a later year under temporary full expensing.

    Example: applying different depreciation rules to acquisition and improvement costs

    Mary and Luke operate a car wash business through the Unicorn Trading Trust. It 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. It 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 can't 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. This is because its aggregated turnover is less than $50 million, the asset cost is 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: 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 can't 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. This is 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

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    Last modified: 15 Jul 2021QC 66394