House of Representatives

Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 8 - Temporary full expensing of depreciating assets

Outline of chapter

8.1 Schedule 7 to the Bill amends the income tax law to allow businesses with an aggregated turnover of less than $5 billion to deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022. Businesses are also able to deduct the full cost of improvements to these assets and to existing eligible depreciating assets made during this period.

8.2 Schedule 7 to the Bill also amends the income tax law to extend the time by which assets that qualify for the enhanced instant asset write-off must be first used or installed ready for use for a taxable purpose until 30 June 2021.

Context of amendments

8.3 The Government is supporting Australian businesses to invest, grow and create more jobs.

8.4 Business investment will support Australia's short-term economic recovery and longer term productive capacity and wage growth.

8.5 The Government is providing a temporary tax incentive to support new investment and deliver significant cash flow benefits to businesses.

8.6 This incentive will be available to around 3.5 million businesses (over 99 per cent of businesses) that employ around 11.5 million workers. It will apply to about $200 billion worth of investment, including 80 per cent of investment in depreciating assets by non-mining businesses.

8.7 From the 2020 budget time until 30 June 2022, businesses with turnover below $5 billion are able to deduct the full cost of eligible depreciating assets of any value in the year they are first held, and first used or installed ready for use for a taxable purpose. The cost of improvements to existing eligible depreciating assets made during this period can also be fully deducted.

8.8 Temporary full expensing supports businesses that invest as it significantly reduces the after-tax cost of eligible assets, providing a cash flow benefit. Temporary full expensing also creates a strong incentive for businesses to bring forward investment before it expires.

8.9 Temporary full expensing builds on the enhanced instant asset write-off and the accelerated depreciation previously announced through the backing business investment incentive.

Summary of new law

8.10 Schedule 7 to the Bill amends the income tax law to allow businesses with an aggregated turnover of less than $5 billion to deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022.

8.11 Businesses are also able to deduct the full cost of improvements to these assets and to existing eligible depreciating assets made during this period.

8.12 Generally, to be eligible for the temporary full expensing incentive, a depreciating asset must be:

·
first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022; and
·
located in Australia and principally used in Australia for the principal purpose of carrying on a business.

8.13 In addition, the depreciating asset must not be:

·
excluded from the uniform capital allowance rules in Division 40 of the ITAA 1997 (such as a building or other capital works); or
·
subject to the capital allowance rules in Subdivision 40-E (about low value and software development pools) or 40-F (about primary production depreciating assets) of the ITAA 1997.

8.14 If the entity has an aggregated turnover of $50 million or more, additional exclusions apply. For these entities, a depreciating asset that starts after the 2020 budget time is excluded from temporary full expensing if:

·
the entity entered into a commitment to hold, construct or use the asset before the 2020 budget time; or
·
the asset is a second hand asset.

8.15 These exclusions are broadly consistent with the backing business investment incentive exclusions.

8.16 Schedule 7 to the Bill also amends the income tax law to extend the time by which assets that qualify for the enhanced instant asset write-off must be first used or installed ready for use for a taxable purpose until 30 June 2021.

8.17 The provisions that prevent small business entities from accessing the simplified depreciation regime for five years if they opt out of the regime continue to be suspended for income years that include 30 June 2021 and 30 June 2022.

Comparison of key features of new law and current law

New law Current law
Small business entities
Under temporary full expensing, small business entities (with an aggregated turnover of less than $10 million) are able to deduct the full cost of:

·
eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022;
·
the second element of cost of these assets and of existing eligible depreciating assets incurred between the 2020 budget time and 30 June 2022; and
·
the balance of their general small business pool.

If an asset is not eligible for temporary full expensing because it was acquired before the 2020 budget time, the time by which the asset must be first used or installed ready for use to qualify for the enhanced instant asset write-off is extended until 30 June 2021.

The provisions that prevent small business entities from accessing the simplified depreciation regime for five years if they opt out of the regime continue to be suspended for income years that include 30 June 2021 and 30 June 2022.

Under the enhanced instant asset write-off, small businesses entities (with an aggregated turnover of less than $10 million) that choose to apply the simplified depreciation rules can deduct the full cost of a depreciating asset that costs less than $150,000 if:

·
the asset is first acquired after 7.30 pm (by legal time in the Australian Capital Territory) on 12 May 2015; and
·
the asset is first used or installed ready for use between 12 March 2020 and 31 December 2020.

Small businesses entities can also deduct the second element of cost of depreciating assets (up to $150,000) incurred in the period.

If a small business entity's general small business pool at the end of an income year is less than $150,000 in this period, the entity can deduct the entire balance of the pool.

Medium and larger sized business entities
Medium sized business entities will generally qualify for temporary full expensing on eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022.

If a depreciating asset is not eligible for temporary full expensing, the enhanced instant asset write-off will continue to apply to the asset. However, the time by which the asset must be first used or installed ready for use to qualify for the enhanced instant asset write-off is extended until 30 June 2021.

Under the enhanced instant asset write-off, medium sized businesses (with an aggregated turnover of between $10 million and $500 million) can deduct the full cost of a depreciating asset that costs less than $150,000 if:

·
the asset is first acquired after 7.30 pm (by legal time in the Australian Capital Territory) on 2 April 2019; and
·
the asset is first used or installed ready for use between 12 March 2020 and 31 December 2020.

Medium sized business entities can also deduct the first amount of the second element of cost, up to $150,000, that is included after the income year in which the asset was first used or installed ready for use and is incurred in the period.

Under temporary full expensing, entities with an aggregated turnover of less than $5 billion that do not use the small business entity simplified depreciation rules are able to deduct the full cost of eligible depreciating assets.

Generally, to be eligible for the temporary full expensing, a depreciating asset must be:

·
first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022; and
·
located in Australia and principally used in Australia for the principal purpose of carrying on a business.

In addition, the depreciating asset must not be:

·
excluded from the uniform capital allowance rules in Division 40 of the ITAA 1997 (such as a building or other capital works); or
·
subject to the capital allowance rules in Subdivision 40-E (about low value and software development pools) or 40-F (about primary production depreciating assets) of the ITAA 1997.

If the entity has an aggregated turnover of $50 million or more, additional exclusions apply. For these entities, a depreciating asset that starts to be held after the 2020 budget time is excluded from temporary full expensing if:

·
the entity had entered into a commitment to hold, construct or use the asset before the 2020 budget time; or
·
the asset is a second hand asset.

Under the backing business investment incentive, entities with an aggregated turnover of less than $500 million that do not use the simplified depreciation rules can, if certain conditions are met, deduct:

·
50 per cent of the cost (or adjustable value) of a depreciating asset held and first used or installed ready for use between 12 March 2020 and 30 June 2021; and
·
the decline in value of the depreciating asset that would otherwise apply under the uniform capital allowance rules, but broadly after reducing the cost (or adjustable value) of the asset by 50 per cent.

Detailed explanation of new law

8.18 Schedule 7 to the Bill amends the income tax law to allow businesses with an aggregated turnover of less than $5 billion to deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022.

8.19 Businesses are also able to deduct the full cost of improvements to these assets and to existing eligible depreciating assets made during this period.

8.20 For most entities, temporary full expensing is contained in Subdivision 40-BB of the ITTP Act. However, for small business entities (with an aggregated turnover of less than $10 million) that choose to apply the simplified depreciation rules, temporary full expensing is contained in modifications to those rules made by section 328-181 of the ITTP Act.

Temporary full expensing for entities (other than entities that apply the small business simplified depreciation rules)

8.21 The temporary full expensing rules for entities that do not apply the small business simplified depreciation rules are contained in Subdivision 40-BB of the ITTP Act.

8.22 If Subdivision 40-BB of the ITTP Act applies to work out the decline in value of a depreciating asset held by an entity for an income year, no other provision in the income tax law applies to work out that decline in value. [Schedule 7, item 1, section 40-145 of the ITTP Act]

Entities that qualify for the temporary full expensing

8.23 Temporary full expensing applies to an entity for an income year if the entity carries on a business and has an aggregated turnover of less than $5 billion for an income year. [Schedule 7, item 1, sections 40-155, 40-160 and 40-170 of the ITTP Act]

Assets that qualify for the temporary full expensing

8.24 A depreciating asset held by an entity qualifies for temporary full expensing if:

·
the entity starts to hold the asset at or after the 2020 budget time and on or before 30 June 2022; and
·
the entity starts to use the asset, or have it installed ready for use, for a taxable purpose on or before 30 June 2022.

[Schedule 7, item 1, subsections 40-150(1), 40-160(1) and 40-170(1) of the ITTP Act]

8.25 The term hold in relation to a depreciating asset is defined in section 40-40 of the ITAA 1997. The table in that section sets out when an entity is the holder of a depreciating asset.

8.26 The 2020 budget time is 7.30 pm, by legal time in the Australian Capital Territory, on 6 October 2020. [Schedule 7, item 1, section 40-140 of the ITTP Act]

Certain assets excluded

8.27 A depreciating asset held by an entity does not qualify for temporary full expensing if the asset is excluded from the uniform capital allowance rules in Division 40 of the ITAA 1997 because of section 40-45 of that Act - that is, for example, an asset that is a building or other capital works. [Schedule 7, item 1, subsections 40-150(2), 40-160(1) and 40-170(1) of the ITTP Act]

8.28 In addition, a depreciating asset held by an entity does not qualify for temporary full expensing if, at the time that the asset is first used or installed ready for use for a taxable purpose:

·
it is not reasonable to conclude that the entity will use the asset principally in Australia for the principal purpose of carrying on a business; or
·
it is reasonable to conclude that the asset will never be located in Australia.

[Schedule 7, item 1, subsections 40-150(3), 40-160(1) and 40-170(1) of the ITTP Act]

8.29 Finally, a depreciating asset held by an entity does not qualify for temporary full expensing if:

·
the asset is allocated to a low-value pool, or expenditure on the asset is allocated to a software development pool - the decline in value of these assets is worked out under Subdivision 40-E of the ITAA 1997; or
·
the entity, or another taxpayer, has deducted or can deduct amounts for the asset under Subdivision 40-F of the ITAA 1997 (which applies to primary production depreciating assets).

[Schedule 7, item 1, subsections 40-150(4), 40-160(1) and 40-170(1) of the ITTP Act]

Temporary full expensing for post-2020 Budget assets

Assets that start to be held after 2020 budget time and start to be used for a taxable purpose in the same income year

8.30 If an entity that has an aggregated turnover of less than $5 billion starts to hold an eligible depreciating asset after the 2020 budget time and starts to use the asset, or have it installed ready for use for a taxable purpose, in the same income year, then the decline in value of the asset for the income year is the asset's cost at the end of the income year (disregarding any amount included in the asset's cost after 30 June 2022). [Schedule 7, item 1, subsection 40-160(1) and paragraph 40-160(3)(a) of the ITTP Act]

8.31 In this regard, the asset's cost at the end of the income year is, broadly, the sum of:

·
the cost of the asset (the first element of cost); and
·
the amount paid during the income year to bring the asset to its present condition and location, such as the cost of improvements (the second element of cost).

8.32 Therefore, if an entity starts to hold an eligible depreciating asset, and starts to use the asset or have it installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2021, the entity is able to deduct the full cost (including the second element of cost) of the asset in the 2020-21 income year.

8.33 However, in working out the amount that can be deducted, any amount included in the asset's cost after 30 June 2022 is disregarded.

Assets that start to be held after 2020 budget time and start to be used for a taxable purpose in a later income year

8.34 If an entity that qualifies for temporary full expensing starts to hold an eligible depreciating asset after the 2020 budget time and starts to use the asset, or have it installed ready for use for a taxable purpose, in a later income year, then the decline in value of the asset for that later income year is the sum of:

·
the asset's opening adjustable value for that later income year; and
·
any amount included in the second element of cost in that later income year (disregarding any amount included in the asset's cost after 30 June 2022).

[Schedule 7, item 1, subsection 40-160(1) and paragraph 40-160(3)(b) of the ITTP Act]

8.35 Therefore, if an entity starts to hold an eligible depreciating asset between the 2020 budget time and 30 June 2021 but does not start to use the asset or have it installed ready for use for a taxable purpose until after 1 July 2021, the entity will be able to deduct the full cost (including the second element of cost) of the asset in the 2021-22 income year, less any decline in value in the 2020-21 income year for any non-taxable use in the 2020-21 income year.

8.36 However, in working out the amount that can be deducted, any amount included in the asset's cost after 30 June 2022 is disregarded.

Assets that start to be held after 2020 budget time where a balancing adjustment event happens in the same income year

8.37 If an entity starts to hold an asset after 2020 budget time and a balancing adjustment event happens to the asset in the same income year, the entity cannot deduct the cost of the asset under temporary full expensing. [Schedule 7, item 1, paragraph 40-160(1)(e) of the ITTP Act]

Exclusions for entities with an aggregated turnover of $50 million or more

8.38 If an entity has an aggregated turnover of $50 million or more for an income year, the decline in value of a depreciating asset that is a post-2020 Budget asset is not worked out under section 40-160 of the ITTP Act if:

·
a commitment in relation to the asset was made before the 2020 budget time; or
·
the asset is a second hand asset.

8.39 These exclusions are broadly consistent with the exclusions that apply under the backing business investment incentive.

Commitments already entered into

8.40 An entity cannot deduct the cost of a depreciating asset (including any second element of cost) under the temporary full expensing incentive if, before the 2020 budget time, the entity has already entered into a commitment to incur the cost in relation to the asset - that is, if before that time, the entity (or, in the case of a partnership, the partner) has:

·
entered into a contract under which it would hold the asset;
·
started to construct the asset; or
·
started to hold the asset in some other way.

[Schedule 7, item 1, subsections 40-160(2), 40-165(2), (3), (4) and (6) of the ITTP Act]

8.41 An option to enter into such a contract is not considered to be a commitment because an option does not require an entity (or partner) to, in fact, enter into the contract. [Schedule 7, item 1, subsection 40-165(5) of the ITTP Act]

8.42 If a commitment has already been entered into in relation to a depreciating asset before the 2020 budget time, temporary full expensing applies to allow a full deduction for the second element of cost of the asset that is incurred between the 2020 budget time and 30 June 2022.

Second hand assets

8.43 The cost of a depreciating asset does not qualify for temporary full expensing if the asset is a second hand asset. There are a range of circumstances in which an asset held by an entity is a second hand asset.

8.44 First, a depreciating asset held by an entity (the holding entity) is a second hand asset if another entity held the asset when it was first used, or first installed ready for use (other than as trading stock or merely for the purposes of reasonable testing and trialling). [Schedule 7, item 1, subsections 40-160(2) and paragraph 40-165(7)(a) of the ITTP Act]

8.45 However, if the asset is an intangible asset, this exclusion will not apply unless the asset was used by the other entity for the purpose of producing ordinary income before the holding entity first used it, or had it installed ready for use, for any purpose. For these purposes, any ordinary income derived by the other entity as a result of the disposal of the asset to the holding entity is disregarded). [Schedule 7, item 1, subsection 40-165(9) of the ITTP Act]

8.46 Second, a depreciating asset held by an entity is a second hand asset if the entity started to hold the depreciating asset because the asset was split or merged. [Schedule 7, item 1, subsection 40-160(2) and paragraph 40-165(7)(b) of the ITTP Act]

8.47 Third, a depreciating asset is also a second hand asset if:

·
the asset is a licence or a sub-licence in relation to an intangible asset; and
·
the intangible asset is a second hand asset.

[Schedule 7, item 1, subsections 40-160(2) and 40-165(8) of the ITTP Act]

8.48 Finally, if a depreciating asset is held by an entity that was previously a member of a consolidated group or multiple entry consolidated group, the asset is a second hand asset if the entity started to hold the asset at or after the 2020 budget time. [Schedule 7, item 1, subsection 40-160(2) and paragraph 40-165(7)(c) of the ITTP Act]

8.49 If an asset is a second hand asset, temporary full expensing applies to allow a full deduction for the second element of cost of the asset that is incurred between the 2020 budget time and 30 June 2022.

Temporary full expensing for the second element of cost

8.50 Temporary full expensing allows entities to deduct the full amount of the second element of cost of both post-2020 Budget depreciating assets and existing depreciating assets.

8.51 Therefore, the decline in value of a depreciating asset held by an entity that has an aggregated turnover of less than $5 billion for an income year is worked out under section 40-170 of the ITTP Act if:

·
either:

-
the entity starts to use the asset, or have installed ready for use, for a taxable purpose in the income year; or
-
the entity started to use the asset, or have installed ready for use, for a taxable purpose in an earlier income year;

·
the asset qualifies for temporary full expensing under section 40-150; and
·
the eligible second element of cost for the asset worked out under section 40-175 of the ITTP Act is greater than nil.

[Schedule 7, item 1, subsection 40-170(1) of the ITTP Act]

8.52 However, if a balancing adjustment event happens to the asset in the income year in which the second element of cost is incurred, the entity cannot deduct the second element of cost of the asset under temporary full expensing. [Schedule 7, item 1, paragraph 40-170(1)(e) of the ITTP Act]

8.53 The eligible second element of cost for a depreciating asset for an income year is the sum of any amounts included in the second element of the asset's cost at a time that is in both of the following periods:

·
the income year; and
·
the period between the 2020 budget time and 30 June 2022.

[Schedule 7, item 1, subsection 40-175 of the ITTP Act]

Decline in value otherwise worked out under the enhanced instant asset write-off rules

8.54 If the enhanced instant asset write-off in section 40-82 of the ITAA 1997 would otherwise apply to work out the decline in value of the asset for an income year, the decline in value of the asset for the income year is the sum of:

·
the amount that would be the asset's decline in value for the income year under the enhanced instant asset write-off (assuming that it did not apply to the second element of cost incurred after the 2020 budget time); and
·
the eligible second element of cost for the asset for the income year.

[Schedule 7, item 1, paragraph 40-170(2)(a) and subsection 40-170(3) of the ITTP Act]

8.55 Therefore, in practical terms, if a depreciating asset qualifies for the enhanced instant asset write-off rules for an income year, the decline in value of the asset for the income year is, broadly, the sum of:

·
the decline in value of the asset for the income year worked out under the enhanced instant asset write-off rules disregarding any amount of the second element of cost for the asset which is incurred between the 2020 budget time and 30 June 2022; and
·
the amount of the second element of cost for the asset which is incurred between the 2020 budget time and 30 June 2022.

Decline in value otherwise worked out under the backing business investment incentive rules

8.56 If the backing business investment incentive in Subdivision 40-BA of the ITTP Act would otherwise apply to work out the decline in value of the asset for an income year, the decline in value of the asset for the income year is the sum of:

·
the amount that would be the asset's decline in value for the income year under paragraph 40-130(2)(a) or (4)(a) of the ITTP Act in the backing business investment incentive rules, (assuming that those rules did not apply to the second element of cost incurred after the 2020 budget time);
·
the eligible second element of cost for the asset for the income year; and
·
the amount that would be the asset's decline in value for the income year, assuming that the asset's cost was reduced by the amounts worked out under paragraph 40-170(4)(a) and (b) of the ITTP Act (so that no amount is double counted).

[Schedule 7, item 1, paragraph 40-170(2)(b) and subsection 40-170(4) of the ITTP Act]

8.57 Therefore, in practical terms, if a depreciating asset qualifies for the backing business investment incentive for an income year, the decline in value of the asset for the income year is, broadly, the sum of:

·
the decline in value of the asset for the income year worked out under the backing business investment incentive rules disregarding any amount of the second element of cost for the asset which is incurred between the 2020 budget time and 30 June 2022; and
·
the amount of the second element of cost for the asset which is incurred between the 2020 budget time and 30 June 2022.

Decline in value otherwise worked out under the uniform capital allowances rules

8.58 If the uniform capital allowances rules in Division 40 of the ITAA 1997 would otherwise apply to work out the decline in value of the asset, the decline in value of the asset for the income year is the sum of:

·
the amount that would be the asset's decline in value for the income year under the uniform capital allowances rules disregarding any amounts included in the eligible second element of cost for the income year; and
·
the eligible second element of cost for the asset for the income year.

[Schedule 7, item 1, paragraph 40-170(2)(c) and subsection 40-170(5) of the ITTP Act]

8.59 Therefore, in practical terms, if the uniform capital allowances rules apply to a depreciating asset for an income year, the decline in value of the asset for the income year is, broadly, the sum of:

·
the decline in value of the asset for the income year worked out under the uniform capital allowances rules disregarding any amount of the second element of cost for the asset which is incurred between the 2020 budget time and 30 June 2022; and
·
the amount of the second element of cost for the asset which is incurred between the 2020 budget time and 30 June 2022.

Example 8.1 - Amounts incurred before 2020 budget time J Pty Ltd has an aggregated turnover of $20 million.J Pty Ltd acquired a depreciating asset for $100,000 on 1 July 2020. It immediately began using the asset for a taxable purpose.J Pty Ltd carried out some improvements on the asset, incurring costs of $25,000 on 28 September 2020 for these improvements. These costs were included in the asset's second element of cost at that time.J Pty Ltd is not eligible for temporary full expensing because these costs were incurred before 2020 budget time. However, as J Pty Ltd qualifies for the enhanced instant asset write-off in this period, it can deduct the first and second elements of the asset's cost incurred in this period under those rules.

Example 8.2 - Availability of temporary full expensing M Pty Ltd has an aggregated turnover of $40 million.M Pty Ltd acquired a depreciating asset for $50,000 on 30 October 2020. It immediately began using the asset for a taxable purpose.On 30 March 2021, M Pty Ltd incurred costs of $30,000 to improve the asset. These costs were included in the asset's second element of cost at that time.M Pty Ltd can deduct the full amount of the first and second element of the asset's cost (that is, $80,000) under temporary full expensing.As the full amount of the asset's cost is deducted under temporary full expensing, the uniform capital allowance rules in Division 40 of the ITAA 1997 (including the enhanced instant asset write-off) do not apply to work out the asset's decline in value.

Example 8.3 - Exclusion for second hand assets R Pty Ltd has an aggregated turnover of $600 million.On 23 December 2020, R Pty Ltd acquired a second hand depreciating asset from another entity for $2 million. R Pty Ltd immediately began using it for a taxable purpose.On 3 February 2021, R Pty Ltd incurred costs of $1 million to improve the asset (which were included in the asset's second element of cost at that time).R Pty Ltd cannot deduct the first element of cost of the asset under temporary full expensing because of the exclusion for second hand assets for entities with an aggregated turnover of $50 million or more. However, R Pty Ltd is able to deduct the full amount of the asset's second element of cost ($1 million) under temporary full expensing.

Uniform capital allowance rules apply after 30 June 2022

8.60 Temporary full expensing ceases to apply on 30 June 2022. Therefore, deductions for the decline in value of depreciating assets after that time will be worked out under the uniform capital allowance rules. [Schedule 7, item 1, subsection 40-180(1) of the ITTP Act]

8.61 However, for the purposes of applying the uniform capital allowance rules:

·
if the prime cost method applies to a depreciating asset, the operation of the formula in subsection 40-75(1) is adjusted so that the later year is taken to be a change year; and
·
for the purpose of applying the balancing adjustment provisions in Subdivision 40-D of the ITAA 1997, the decline in value worked out under temporary full expensing is taken to have been worked out under the uniform capital allowance rules.

[Schedule 7, item 1, subsections 40-180(2) and (3) of the ITTP Act]

Temporary full expensing for small business entities that apply the simplified depreciation rules

8.62 Small business entities (with an aggregated turnover of less than $10 million) can choose to apply the simplified depreciation rules in Subdivision 328-D of the ITAA 1997. The simplified depreciation rules are modified by section 328-180 of the ITTP Act. Under those modifications, small business entities can deduct the full cost of a depreciating asset that costs less than $150,000 provided that:

·
the asset is first acquired after 7.30 pm (by legal time in the Australian Capital Territory) on 12 May 2015; and
·
the asset is first used or installed ready for use between 12 March 2020 and 31 December 2020.

8.63 In addition, small businesses entities can deduct the second element of cost, up to $150,000, of assets incurred in the period.

8.64 If a small business entity's general small business pool is less than $150,000 at the end of an income year in this period, the entity can deduct the entire balance of the pool.

8.65 The temporary full expensing rules for small business entities that apply the small business simplified depreciation rules are contained in modifications to the operation of Subdivision 328-D of the ITAA 1997. These modifications apply if, between the 2020 budget time and 30 June 2022, a small business entity that applies the small business simplified depreciation rules:

·
starts to hold an asset; and
·
starts to use the asset, or have it installed ready for use, for a taxable purpose.

8.66 In these circumstances:

·
paragraph 328-180(1)(b) of the ITAA 1997 (which sets a limit on the cost of an asset that qualifies for full expensing) is disregarded;
·
paragraph 328-180(2)(a) of the ITAA 1997 (which sets a limit on the amount of the second element of cost of an asset that qualifies for full expensing) is disregarded;
·
paragraph 328-180(3)(a) of the ITAA 1997 (which allocates an amount of the second element of cost of an asset to the general small business pool) is disregarded; and
·
the words 'less than $1,000' in subsection 328-210(1) of the ITAA 1997 (which place a cap on the value of a small business entity's general small business pool that can be fully deducted) are disregarded.

[Schedule 7, item 4, section 328-181 of the ITTP Act]

8.67 The 2020 budget time is 7.30 pm, by legal time in the Australian Capital Territory, on 6 October 2020. [Schedule 7, item 2, subsection 328-180(1) of the ITTP Act]

8.68 As a result, under temporary full expensing, between the 2020 budget time and 30 June 2022, small business entities that apply the simplified depreciation rules can deduct:

·
the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the 2020 Budget time and 30 June 2022;
·
the second element of cost of these assets and of existing eligible depreciating assets incurred during this period; and
·
the balance of their general small business pool.

Adjustments to the enhanced instant asset write-off

8.69 Currently, the enhanced instant asset write-off for small and medium sized business entities applies to a depreciating asset only if an asset is first used or installed ready for use by 31 December 2021. For assets acquired by 31 December 2020, this time is being extended until 30 June 2021. [Schedule 7, items 5 to 8 and 11, section 40-82 of the ITAA 1997 and section 328-180 of the ITTP Act]

8.70 In addition, the provisions that prevent small business entities from accessing the simplified depreciation regime for five years if they opt out of that regime continue to be suspended for income years that include 30 June 2021 and 30 June 2022. [Schedule 7, item 3, paragraph (b) of the definition of 'increased access year in subsection 328-180(1) of the ITTP Act]

Modification to the backing business investment incentive

8.71 The backing business investment incentive exclusion for second hand assets is being modified with effect from the 2020 budget time so that it is consistent with the temporary full expensing exclusion for second hand assets. Therefore, for the purposes of applying the exclusion, a depreciating asset is taken to be a second hand asset if:

·
the asset is a licence or a sub-licence in relation to an intangible asset; and
·
the intangible asset is a second hand asset.

[Schedule 7, items 9 and 10, subsection 40-125(7A) of the ITTP Act]

Consequential amendments

8.72 A consequential amendment is made to the consolidation tax cost setting rules that apply when an entity joins a consolidated group or multiple entry consolidated group. The amendment ensures that, if a joining entity holds a depreciating asset which qualifies for full expensing, the tax cost setting rules apply to the asset in the same way as they apply to a depreciating asset which qualifies for the enhanced instant asset write-off or the backing business investment incentive. [Schedule 7, item 25, subsection 40-125(7A) of the ITAA 1997]

8.73 In addition, minor consequential amendments to the income tax law:

·
update guide material; and
·
insert notes to clarifying the concurrent operation of the existing regimes with the new regime in Subdivision 40-BB.

[Schedule 7, items 12 to 24, 26 and 27, notes to subsections 40-65(1), 40-75(2), 40-82(2A), 40-82(3A), 328-180(1), 328-180(2), 328-180(3), 328-210(1), 328-250(1), 328-250(4) 328-253(4) of the ITAA 1997, notes to subsection 40-120(1) of the ITTP Act]

Application and transitional provisions

8.74 The amendments made to the ITAA 1997 and ITTP Act to give effect to temporary full expensing apply from 7.30pm (by legal time in the Australian Capital Territory) on 6 October 2020.

8.75 The provisions in Schedule 7 to the Bill commence on the first day of the first quarter after Royal Assent. [Section 2 of the Bill]


View full documentView full documentBack to top