Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)Chapter 1 Extending and increasing the threshold for the instant asset write-off for small business entities
Outline of chapter
1.1 Schedule 1 to this Bill amends the tax law to:
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- extend by 12 months to 30 June 2020 the period during which small business entities can access expanded accelerated depreciation rules (instant asset write-off); and
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- increase the threshold below which amounts can be immediately deducted under these rules from $20,000 to $25,000 from the day the measure was announced - 29 January 2019 - until 30 June 2020.
1.2 This increase in the threshold and the extension provide a boost to small business activity and investment for a further period.
1.3 All legislative references are to the ITAA 1997 unless the contrary is indicated.
Context of amendments
Small business entities
1.4 Division 328 provides a range of income tax concessions for small business entities, including access to simplified depreciation rules (see Subdivision 328-D). Under section 328-110, an entity is a small business entity for an income year if the entity carries on a business in that year and either:
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- the entity carried on a business in the prior income year and its aggregated turnover was less than a threshold amount; or
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- the aggregated turnover of the entity in the current income year is likely to be less than that threshold.
1.5 In the 2015-16 income year, the threshold was $2 million, while for 2016-17 and later income years it is $10 million.
Accelerated depreciation for small business entities
1.6 Accelerated depreciation encourages additional capital investment by small businesses by lowering the pre-tax rate of return required to justify new investments. Increasing the immediate deduction for capital expenditure improves small businesses' cash flow. Small businesses tend to be more vulnerable to cash flow problems than larger businesses because their profitability tends to be more volatile and they typically have lower levels of retained earnings. The impact is expected to be bigger for new small businesses, as large capital expenditures often occur early in the life of businesses.
1.7 The Tax Laws Amendment (Small Business Measures No. 2) Act 2015 amended the tax law to temporarily increase to $20,000 the threshold below which certain depreciating assets, costs relating to depreciating assets and general small business pools could be immediately deducted by small business entities. The temporary increase applied under that Act from 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 until 30 June 2017. The threshold was to revert back to $1,000 from 1 July 2017.
1.8 The temporary threshold increase was subsequently extended to the 2017-18 and 2018-19 income years. Following these extensions, the threshold was to revert back to $1,000 from 1 July 2019. On 29 January 2019, the Prime Minister announced that the Government would increase the immediate deductibility threshold to $25,000 for small businesses and extend the application of the new threshold until 30 June 2020.
Summary of new law
1.9 Schedule 1 to this Bill amends the tax law to increase from $20,000 to $25,000 the threshold below which small business entities can immediately deduct depreciating assets, amounts included in the second element of a depreciating asset's cost and general small business pools. This applies from 29 January 2019.
1.10 Further Schedule 1 also extends to 30 June 2020 the period for which the increased threshold for accelerated depreciation for small businesses applies, together with the deferral of the five year lock out rule for small businesses that previously opted out of the small business entity capital allowance provisions.
Comparison of key features of new law and current law
| New law | Current law |
| Extension of deduction for depreciating assets costing less than $25,000 | |
| Small business entities can claim an immediate deduction for depreciating assets that cost less than
$25,000,
provided the asset is first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and first used or installed ready for use on or after 29 January 2019 but before
1 July 2020.
Depreciating assets that do not meet these timing requirements for the $25,000 or $20,000 thresholds continue to be subject to the $1,000 threshold. Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2020. |
Small business entities can claim an immediate deduction for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and first used or installed ready for use before 1 July 2019. Depreciating assets that do not meet these timing requirements continue to be subject to the $1,000 threshold.
Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2019. |
| Extension for deduction for amounts included in the second element of the cost of depreciating assets | |
| Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than
$25,000
and the cost must be incurred on or after 29 January 2019 but before
1 July 2020.
Costs that are incurred outside of these times and the times when the prior $20,000 threshold applied continue to be subject to the $1,000 threshold. Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year, where the amount is less than $1,000, and the cost is incurred on or after 1 July 2020. |
Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and before 1 July 2019. Costs that are incurred outside of these times continue to be subject to the $1,000 threshold.
Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year, where the amount is less than $1,000, and the cost is incurred on or after 1 July 2019. |
| Extension of deduction for low pool values | |
| For income years that end on or after 29 January 2019 and prior to
1 July 2020,
assets that cost
$25,000
or more, and costs of
$25,000
or more relating to depreciating assets can be allocated to a small business entity's general small business pool and deducted at a specified rate for the depletion of the pool.
Assets and costs allocated to a general small business pool are deducted at a rate of 15 per cent in the year they are allocated, and a rate of 30 per cent in subsequent income years. If the balance of a small business entity's general small business pool is less than $25,000 at the end of an income year that ends on or after 29 January 2019 and before 1 July 2020, the small business entity can claim a deduction for the entire balance of the pool. If the balance of a small business entity's general small business pool is less than $1,000 at the end of an income year that ends after 30 June 2020, the small business entity can claim a deduction for the entire balance of the pool. |
From 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015, and before 1 July 2019 assets that cost $20,000 or more, and costs of $20,000 or more relating to depreciating assets can be allocated to a small business entity's general small business pool and deducted at a specified rate for the depletion of the pool.
Assets and costs allocated to a general small business pool are deducted at a rate of 15 per cent in the year they are allocated, and a rate of 30 per cent in subsequent income years. If the balance of a small business entity's general small business pool is less than $20,000 at the end of an income year, the small business entity can claim a deduction for the entire balance of the pool. The income year must end on or after 12 May 2015, and before 1 July 2019. If the balance of a small business entity's general small business pool is less than $1,000 at the end of an income year that ends after 30 June 2019, the small business entity can claim a deduction for the entire balance of the pool. |
| Deferral of five year 'lock-out' rule | |
| The increased thresholds of $20,000 and
$25,000
respectively that are in operation at relevant times between 12 May 2015 and
30 June 2020
apply to all small business entities, including those subject to the five year lock-out rule in that period because the small business previously opted out of the small business entity capital allowance provisions.
For the purposes of applying the lock-out rule to an income year after 30 June 2020, only the choice made in the last income year ending before 1 July 2020 is relevant. |
The increased threshold that applies between 12 May 2015 and 30 June 2019 applies to all small business entities, including those subject to the five year lock out rule in that period because the small business previously opted out of the small business entity capital allowance provisions.
For the purposes of applying the lock out rule to an income year after 30 June 2019, only the choice made in the last income year ending before 1 July 2019 is relevant. |
Detailed explanation of new law
1.11 The temporary threshold that applies for the cost of depreciating assets, costs incurred in relation to a depreciating asset included in the second element of a depreciating asset's cost, and the low pool value deduction under the small business entity capital allowance provisions is increased from $20,000 to $25,000 from 29 January 2019.
1.12 Further, the period in which the increased temporary thresholds apply of $20,000 and $25,000 is extended from 30 June 2019 to 30 June 2020.
1.13 The threshold returns to $1,000 for income years ending on or after 1 July 2020.
Deductions for depreciating assets
1.14 A small business entity that has elected to use the small business entity capital allowance rules in Subdivision 328-D for an income year may immediately deduct or 'write off' the taxable purpose proportion of the cost of an asset acquired for less than a threshold amount.
1.15 The 'taxable purpose proportion' of a depreciating asset is defined in subsection 328-205(3) and in general terms represents the proportion of an asset's use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than the threshold is claimed in the income year in which the asset was first used or installed ready for use.
1.16 This threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied for assets that were first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory on 12 May 2015, and first used or installed ready for use before 1 July 2019.
1.17 The amendments increase the threshold to $25,000 and extend the period in which the increased threshold applies. It now applies to assets that were first acquired at or after 7.30 pm, by legal time in the Australian Capital Territory on 12 May 2015 and first used or installed ready for use on or after 29 January 2019 but before 1 July 2020. [Schedule 1, item 10, paragraph 328-180(4)(b) of the Income Tax (Transitional Provisions) Act 1997]
Deductions for amounts included in the second element of the cost of depreciating assets
1.18 A small business entity can also immediately deduct an amount included in the second element of a depreciating asset's cost (for example, an amount spent on improving or transporting a depreciating asset), provided the amount is:
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- less than the threshold;
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- the first such amount to be deducted in respect of the asset; and
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- the asset was written off (its cost was fully deducted) in a previous income year.
1.19 Consistent with the changes to the threshold for writing off depreciating assets, this threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied for costs included in the second element of the depreciating assets cost during the period commencing at 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 and ending on 30 June 2019.
1.20 The amendments increase the threshold to $25,000 and extend the period in which the increased threshold applies. It now applies to amounts included in the second element of the asset's cost during the period on or after 29 January 2019 but before 1 July 2020. [Schedule 1, item 11, paragraph 328-180(5)(b) of the Income Tax (Transitional Provisions) Act 1997]
Deductions for low pool values
1.21 A small business entity can also deduct the balance of its general small business pool at the end of an income year if the balance of the pool at the end of the year is less than a threshold amount. For this purpose, the balance of the pool is determined prior to calculating any deductions in respect of the pool for the income year.
1.22 This threshold is generally $1,000. However, prior to these amendments a higher $20,000 threshold applied to income years that end during the period commencing at 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2015 and ending on 30 June 2019.
1.23 The amendments increase the amount of the threshold to $25,000 and extend the period in which the increased threshold applies. The $25,000 threshold now applies to income years that end on or after 29 January 2019 but before 1 July 2020. [Schedule 1, item 9, the definition of increased access year in subsection 328-180(1) of the Income Tax (Transitional Provisions) Act 1997]
Five year 'lock-out' rule
1.24 A small business entity that elects to apply the small business capital allowance provisions in an income year, and then does not choose to apply the provisions for a later income year in which the entity satisfies the conditions to make this choice (that is, the entity 'opted out'), is not able to apply the small business capital allowance provisions for a period of five income years. This restriction commences from the first of the later years for which the entity could have made the choice to apply the provisions. This rule is contained in subsection 328-175(10), and is commonly referred to as the 'lock out' rule.
1.25 Prior to these amendments, the operation of the lock out rule was modified for income years that ended on or after 12 May 2015 but before 1 July 2019 (referred to as 'increased access years'). Small business entities did not need to apply the lock out rule to these years. Further, when determining if the lock out rule applies in years after the increased access years, all income years prior to the last increased access year are disregarded.
1.26 The amendments extend the period for which the operation of the lock out rule is modified. The modifications now apply for income years that end on or after 12 May 2015 but before 1 July 2020. For most small business entities, this results in one further increased access year. [Schedule 1, item 9, the definition of increased access year in subsection 328-180(1) of the Income Tax (Transitional Provisions) Act 1997]
Consequential amendments
1.27 A number of consequential amendments are made to the ITAA 1997 and the Income Tax (Transitional Provisions) Act 1997 to update relevant guidance material to reflect the amendments made by Schedule 1 to this Bill. [Schedule 1, items 1 to 8, the notes to paragraphs 328-180(1)(b), (2)(a) and (3)(a), note 2 to subsection 328-210(1) and the notes to subsections 328-250(1), (4) and 328-253(4) of the ITAA 1997 and the heading to section 328-180 of the Income Tax (Transitional Provisions) Act 1997]