Edited version of private advice

Authorisation Number: 1051840202349

Date of advice: 19 May 2021

Ruling

Subject: Small business depreciation - instant asset write off and temporary full expensing

Question 1

Is Trust X carrying on a business of letting rental properties for the purposes of paragraph 328-110(1)(a) of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Does Trust X meet the requirements of accelerated depreciation using a general small business pool under section 328-185 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 3

Is Trust X eligible for instant asset write off under section 328-180 of the Income Tax Assessment Act 1997 for removable fixtures purchased for commercial rental properties?

Answer

Yes

Question 4

Is Trust X eligible for Temporary Full Expensing under Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 to deduct the business portion of the cost for removable fixtures purchased for commercial rental properties?

Answer

Yes

This ruling applies for the following period periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Trust X through its trustee company wholly owns commercial retail showrooms and office tenancies covering a total of xxxx tenantable square metres and xxxx square metres of car parking ('Property')

The Property's estimated value is $xx million.

The Property was originally constructed to be a profitable investment.

The Property has been maintained and changed to keep up to date with current trends to ensure maximum profits are obtained.

The type of tenants has changed over the years in order to secure higher profitability.

Trust X employs a property manager.

Trust X pays wages to the property manager and a director of the trustee company (Director) for their activity in managing the property and tenancies.

The property manager and the Director are actively involved in:

•                     seeking tenants and showing visitors over the premises

•                     making agreements regarding the securing of tenancies

•                     making decisions regarding improvements and modifications to the properties

•                     engaging in fit out negotiations with tenants, and

•                     securing relevant legal contracts regarding letting the Property.

A dedicated property management office is kept onsite which contains a general reception area, office for the property manager and office for the Director.

The Director is motivated to ensure the profitability of the activity continues to grow. The net profit of Trust X from rental activities of the Property for the last 3 income years has been profitable.

It is expected that the aggregated turnover of Trust X for the income year ending 30 June 20XX will be less than $3.5 million. It will not exceed $10 million.

Trust X purchased depreciating assets for use in the property. All depreciating assets purchased in the income year ending 30 June 20XX were acquired for a cost less than $150,000.

All depreciating assets purchased are not excluded assets for the simplified depreciation rules.

Some depreciating assets were purchased and installed for use for taxable purpose at the property after 1 July 20XX and prior to 7:30pm (AEDT) 6 October 20XX.

Some depreciating assets were purchased and installed for use for taxable purpose at the property after 7:30pm (AEDT) 6 October 20XX and before 30 June 20XX.

All depreciating assets purchased will be installed for use for taxable purpose at the property prior to 30 June 20XX.

Trust X has not currently applied the simplified depreciation rules as it only had a few small assets in the income year ended 30 June 20XX and did not require the use of the simplified depreciation rules.

Trust X will elect to apply the simplified depreciation rules in the income year ending 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-180

Income Tax Assessment Act 1997 section 328-185

Income Tax Assessment Act 1997 section 995-1

Income Tax (Transitional Provisions) Act 1997 Subdivision 40-BB

Income Tax (Transitional Provisions) Act 1997 section 40-155

Income Tax (Transitional Provisions) Act 1997 section 328-180

Income Tax (Transitional Provisions) Act 1997 section 328-181

Reasons for decision

Question 1

Summary

To be a small business entity, an entity must be carrying on a business. The activities of Trust X in its management and leasing of the Property support a conclusion that Trust X is carrying on a business of letting rental properties for the purposes of paragraph 328-110(1)(a) of the Income Tax Assessment Act 1997.

Detailed reasoning

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. As stated in Martin v Federal Commissioner of Taxation (1953) 90 CLR 470; 10 ATD 226; (1953) 5 AITR 548:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and... the determination is eventually based on the large or general impression gained.

Taxation Ruling TR 97/11

Taxation Ruling TR 97/11 Income Tax: Am I carrying on a business of primary production? (TR 97/11) provides guidance to determine if a taxpayer is in business for tax purposes. TR 97/11 states at paragraph 13 that the courts have determined that the following factors are considered important in determining the question of business activity:

•                     whether the activity has a significant commercial purpose or character

•                     whether the taxpayer has more than just an intention to engage in business

•                     whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•                     whether there is regularity and repetition of the activity

•                     whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•                     the size, scale and permanency of the activity, and

•                     whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained from an examination of the facts (Martin v Federal Commissioner of Taxation (1953) 90 CLR 470; 10 ATD 226; (1953) 5 AITR 548).

The property owned and operated by Trust X consists of commercial retail showrooms and office tenancies. The Property covers xxxx tenantable square metres along with parking spaces.

Trust X employs a property manager who is being remunerated with wages and the Director is heavily involved in the operation of the commercial activities as well.

The rental activities such as securing tenants and negotiating business fit outs are of a commercial nature which are conducted with repetition and regularity. It is accepted that significant time are devoted on daily basis to operate the commercial activities conducted by Trust X.

Therefore, based on the information provided the activities of Trust X in its management and leasing of the Property support a conclusion that Trust X is carrying on a business of letting rental properties for the purposes of paragraph 328-110(1)(a) of the Income Tax Assessment Act 1997.

Question 2

Summary

Trust X is carrying on a business and satisfies the requirements to be a small business entity under section 328-110 of the ITAA 1997. Trust X is eligible for small business accelerated depreciation using a general small business pool under section 328-185 of the ITAA 1997.

Detailed reasoning

Subsection 328-185(1) of the ITAA 1997 provides:

If you are a small business entity for an income year and you have chosen to use this Subdivision for that year, you deduct amounts for your depreciating assets (except assets for which you have deducted or can deduct under amount under section 328-180) through a pool, which allows you to deduct amounts for them as if they were a single asset, thereby simplifying your calculations. You use one rate for the pool.

Small business entity has the meaning given by section 328-110 of the ITAA 1997. It provides:

328-110(1)

You are a small business entity for an income year (the current year) if:

(a)          You carry on a business in the current year; and

(b)          One or both of the following applies:

                            (i)                You carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

                          (ii)                Your aggregated turnover for the current year is likely to be less than $10 million

Trust X is carrying on a business of letting rental properties for the 20XX income year. Information has been provided that the aggregated turnover of Trust X is not expected to exceed $3.5 million for the income year ending 30 June 20XX.

As Trust X carries on a business and has a turnover of less than $10 million in the 20XX income year (and also the previous year), Trust X is a Small business entity pursuant to section 328-110 of the ITAA 1997.

Trust X will elect to apply the simplified depreciation rules in the income year ending 30 June 20XX.

As such Trust X can deduct amounts for its depreciating assets (except assets for which it has deducted or can deduct under amount under section 328-180) through a pool.

Trust X is eligible for small business accelerated depreciation using a general small business pool under section 328-185 of the ITAA 1997.

Conclusion

Trust X is carrying on a business and satisfies the requirements to be a small business entity under section 328-110 of the ITAA 1997. Trust X is eligible for small business accelerated depreciation using a general small business pool under section 328-185 of the ITAA 1997.

Question 3

Summary

Trust X is entitled to claim the Instant Asset Write off under section 328-180 of the ITAA 1997 for cost of the depreciating assets purchased for the commercial rental properties purchased within the income year ending 30 June 20XX prior to 7:30pm (AEDT) 6 October 20XX (Budget time).

The treatment of the cost of depreciating assets purchased after Budget time in the 20XX income year is explained in question 4 below.

Detailed reasoning

Small business instant asset write off is provided under section 328-180 of the ITAA 1997 which provides:

328-180(1)

You deduct the taxable purpose proportion of the adjustable value of a depreciating asset for the income year in which you start to use the asset, or have it installed ready for use, for a taxable purpose if:

(a)          You were a small business entity for that year and the year in which you started to hold it; and

(ab) you chose to use this Subdivision for each of those years; and

(b)          The asset is a depreciating asset whose cost at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose is less than $1,000.

Note: This threshold may be affected by section 328-180 (about temporary increased access to accelerated depreciation) or 328-181 (about temporary full expensing) of the Income Tax (Transitional Provisions) Act 1997.

Under section 328-180 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997), the applicable threshold for Instant Asset Write off for the period between 12 March 20XX to 30 June 20XX was increased to $150,000.

Generally, eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.

Instant asset write-off can be used for:

•         multiple assets, if the cost of each individual asset is less than the relevant threshold

•         new and second-hand assets.

If you are a small business, you will need to apply the simplified depreciation rules in order to claim the instant asset write-off. It cannot be used for assets that are excluded from those rules.

For assets first used or installed ready for use between 12 March 20XX until 30 June 20XX, and purchased by 31 December 20XX, the instant asset write-off:

•         threshold amount for each asset is $150,000 (up from $30,000)

•         eligibility extends to businesses with an aggregated turnover of less than $500 million (up from $50 million).

Trust X has purchased depreciating assets by 31 December 20XX that:

•         are not excluded asset/s for the purposes of accessing Small business instant asset write off

•         cost less than $150,000 threshold amount, and

•         while the trust's aggregated turnover is less than $500 million

Trust X is entitled to claim the Instant Asset Write off under section 328-180 of the ITAA 1997 for the depreciating assets purchased for the commercial rental properties purchased and installed for use within the income year ending 30 June 20XX prior to Budget time.

These depreciating assets do not need to be added to the small business pool.

The treatment of the cost of depreciating assets purchased after Budget time in the 20XX income year is explained in question 4 below.

Conclusion

Under section 328-180 of the ITAA 1997, Trust X is entitled to claim the Instant Asset Write Off for the cost of the depreciating assets purchased for the commercial rental properties purchased within the income year ending 30 June 20XX prior to Budget time.

Question 4

Summary

Trust X is eligible for temporary full expensing under Subdivision 40-BB of the ITTPA 1997 to deduct the business portion of the cost for the depreciating assets fixtures purchased and installed after the 20XX Budget time but within the income year ending 30 June 20XX.

These depreciating assets do not need to be added to the small business pool.

Detailed reasoning

The government has introduced new measures to support business investment as part of its Economic Stimulus Package in response to COVID-19. In particular, the temporary full expensing measure provides a temporary tax incentive to support new investment and deliver significant cash flow benefits by allowing eligible businesses to immediately 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 2020 Budget time and 30 June 2022.

The temporary full expensing provisions were enacted by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 and amended by the Treasury Laws Amendment (2020 Measures No. 6) Act 2020.

Section 40-155 of the ITTPA 1997 provides:

"Businesses with turnover under $5 billion

This section covers you for an income year if:

(a)

you are a small business entity for the income year; or

(b)

you would be a small business entity for the income year if:

            (i)                each reference in Subdivision 328-C of the Income Tax Assessment Act 1997 (about what is a small business entity) to $10 million were instead a reference to $5 billion; and

           (ii)                the reference in paragraph 328-110(5)(b) of that Act to a small business entity were instead a reference to an entity covered by this section"

Full expensing is available for depreciating assets that are:

•                     new or second-hand (if it is a second-hand asset, only available for entities with aggregated turnover of below $50 million)

•                     first held by the entity at or after the 2020 Budget time

•                     first used or installed ready for use by the entity for taxable purpose (such as a business purpose) between the 2020 Budget time and 30 June 2022.

Trust X is a small business entity and full expensing under Subdivision 40-BB is available for eligible depreciating assets. Further, Trust X will elect to use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997 for the income year ending 30 June 20XX.

Section 328-181 of the ITTPA 1997 provides:

"SECTION 328-181 Full expensing - 2020 budget time to 30 June 2022

328-181(1)

In this section:

2020 budget time has the same meaning as in section 328-180.

Year asset first used etc. for a taxable purpose

328-181(2)

For the purposes of determining whether subsection 328-180(1) of the Income Tax Assessment Act 1997 allows you to deduct an amount in relation to a depreciating asset, disregard paragraph (b) of that subsection (which sets a limit of $1,000 on the cost of the asset) if, in the period beginning at the 2020 budget time and ending on 30 June 2022, you:

(a)

start to hold the asset; and

(b)

start to use it, or have it installed ready for use, for a taxable purpose.

Years later than the year asset first used etc. for a taxable purpose

328-181(3)

For the purposes of determining whether subsection 328-180(2) of the Income Tax Assessment Act 1997 allows you to deduct an amount in relation to a depreciating asset, disregard paragraph (a) of that subsection (which sets a limit of $1,000 on the amount) if the amount is included in the second element of the cost of the asset at any time in the period beginning at the 2020 budget time and ending on 30 June 2022.

328-181(4)

In applying paragraph 328-180(3)(a) of the Income Tax Assessment Act 1997 to an asset, disregard an amount included in the second element of the cost of the asset if the amount is deducted under subsection 328-180(2) of that Act, as modified by subsection (3) of this section.

Low pool value

328-181(5)

Section 328-210 of the Income Tax Assessment Act 1997 applies as if the words " less than $1,000 but " in subsection (1) were disregarded, in relation to a deduction for an income year that ends:

(a)

at or after the 2020 budget time; and

(b)

on or before 30 June 2022."

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 Budget time to 30 June 2022. These assets are not added to your small business pool. Further, the balance of the small business pool at the end of an income year ending between 6 October 20XX and 30 June 20XX will also be immediately deducted.

Some of the depreciating assets purchased by Trust X will be after the 2020 Budget time. The depreciating assets will be installed for use for taxable purpose prior to income year ending 30 June 20XX. Under temporary full expensing, no threshold applies to the cost of the asset. Accordingly, Trust X is eligible to deduct the business portion of the depreciating assets purchased and installed for use after the 2020 Budget time for the income year ending 30 June 20XX.

Conclusion

Trust X is eligible for temporary full expensing under Subdivision 40-BB and section 328-181 of the ITTPA 1997 to deduct the business portion of the cost for the depreciating assets fixtures purchased and installed after the 2020 Budget time but within the income year ending 30 June 20XX.

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