House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon. Michael Sukkar MP)

Chapter 4 Extending the Instant Asset Write-Off

Outline of chapter

4.1 Schedule 4 to the Bill amends the income tax law to allow a business with an aggregated turnover for the income year of less than $500 million to immediately deduct the cost of a depreciating asset (instant asset write-off). The asset must cost less than a threshold of $150,000 and be first used or installed ready for use for a taxable purpose by 31 December 2020. Without the amendments the $150,000 instant asset write-off would end on 30 June 2020.

4.2 Schedule 4 also amends the income tax law to allow a larger business (with an aggregated turnover for the income year of $10 million or more and less than $500 million) that has adopted a substituted accounting period to access the $150,000 instant asset write-off for an asset first used or installed ready for use for a taxable purpose from 12 March 2020 until 31 December 2020. Equivalent amendments are also made to allow an eligible business that has adopted a substituted accounting period to access the $30,000 instant asset write-off prior to 12 March 2020 regardless of when their income year ends.

4.3 By extending the previous end date of 30 June 2020 to 31 December 2020, the amendments give businesses additional time to access the $150,000 instant asset write-off for their investments, including those investments that have been delayed by supply chain disruptions. Further, the amendments extend cash flow support to businesses through the early stages of the recovery from the economic conditions caused by the Coronavirus.

Context of amendments

Enhancement of the instant asset write-off in response to the Coronavirus

4.4 In response to the economic conditions caused by the Coronavirus, Schedule 1 to the Coronavirus Economic Response Package Omnibus Act 2020 amended the tax law to increase the cost threshold below which small business entities can access an immediate deduction for depreciating assets and certain related expenditure from $30,000 to $150,000. This applies from 12 March 2020 to 30 June 2020.

4.5 Those amendments also provide access to an instant asset write-off for depreciating assets and certain related expenditure costing less than $150,000 for entities with an aggregated turnover for the income year of $10 million or more, but less than $500 million (up from a cap of $50 million prior to those amendments). Those amendments apply from 12 March 2020 to 30 June 2020.

4.6 The amendments to the instant asset write-off made by the Coronavirus Economic Response Package Omnibus Act 2020 were designed to support business investment. In particular, the expansion of the instant asset write-off was aimed at assisting economic growth in the short-term, and encouraging a stronger economic recovery following the Coronavirus outbreak.

4.7 The economic conditions caused by the Coronavirus have disrupted supply chains and imposed cash-flow pressures on many businesses. Many businesses have been required to focus on their immediate operations in the face of the Coronavirus challenges, and are yet to consider their future investment in assets. These conditions have meant that not all businesses that would like to take advantage of the instant asset write-off have been able to do so.

Small business entities

4.8 Division 328 of the ITAA 1997 provides a range of tax concessions for small business entities, including access to simplified depreciation rules (see Subdivision 328-D). Under section 328-110 of the ITAA 1997, an entity is generally a small business entity for an income year if the entity carries on a business in that year, and either:

•

the entity carried on a business in the prior income year and its aggregated turnover for that income year was less than a threshold amount; or

•

the aggregated turnover of the entity in the current income year is likely to be less than that threshold.

4.9 In the 2015-16 income year, the aggregated turnover threshold was $2 million, while for 2016-17 and later income years it is $10 million.

4.10 In determining if an entity is a small business entity, the entity is deemed to be carrying on a business if it is winding up a business in an income year, provided that the entity was a small business entity for the income year in which that entity stopped carrying on the business. Further, a partner in a partnership in their capacity as a partner is not a small business entity.

4.11 An entity cannot be a small business entity for an income year because of its expected turnover if it has carried on business in the two previous income years and its aggregated turnover for each of those years was $10 million or more.

Summary of new law

4.12 The amendments extend the $150,000 instant asset write-off for a further six months until 31 December 2020. This gives businesses additional time to access the instant asset write-off for their investments.

4.13 The amendments also adjust the criteria for access to the instant asset write-off so that a business that has adopted a substituted accounting period can access the $30,000 write-off and the $150,000 write-off regardless of when their income year ends, provided the other conditions for access to the write-off are satisfied.

Comparison of key features of new law and current law

Detailed explanation of new law

Extending the availability of the instant asset write-off

4.14 As part of the response to the economic impacts of the Coronavirus, the Government increased the instant asset write-off threshold from $30,000 to $150,000 and expanded access to include businesses with aggregated turnover for the income year of less than $500 million from 12 March 2020 until 30 June 2020 under the Coronavirus Economic Response Package Omnibus Act 2020. The expansion of the instant asset write-off assists Australian businesses and economic growth in the short-term, encourages a stronger economic recovery following the Coronavirus outbreak and allows businesses to bring forward investment. Support for businesses upgrading and investing in income producing assets also provides longer term economic benefits.

4.15 The amendments provide further support to business cash flow and give businesses additional time for assets to be delivered and installed, by extending the operation of the instant asset write-off concession to 31 December 2020. These eligible depreciating assets must cost less than $150,000, and be first acquired at or after:

•

7.30 pm (legal time in the Australian Capital Territory) on 12 May 2015 for small business entities using the simplified depreciation rules; and

•

7.30 pm (legal time in the Australian Capital Territory) on 2 April 2019 for larger businesses.

4.16 Other references in this Chapter to 12 May 2015 and 2 April 2019 refers to 7.30 pm legal time in the Australian Capital Territory on those days.

4.17 The eligible depreciating assets must also be first used or installed ready for use for a taxable purpose on or after 12 March 2020, but before 1 January 2021. [Schedule 4, items 2, 3, 8, 23 and 24, paragraphs 40-82(1)(b), 40-82(1)(d), 40-82(1)(e), subsections 40-82(2A) and 40-82(2B) and paragraph 40-82(4A)(a) of the ITAA 1997 and subsection 328-180(4A) and subparagraph 328-180(5)(d)(ii) of the ITTPA 1997]

4.18 The amendments extend the $150,000 instant asset write-off introduced by the Coronavirus Economic Response Package Omnibus Act 2020 by allowing:

•

small business entities (aggregated turnover for the income year is less than $10 million) that are using the simplified rules to continue to access the $150,000 instant asset write-off (under section 328-180 of the ITTPA 1997) until 31 December 2020; and

•

larger business entities (aggregated turnover of $10 million or more but less than $500 million for the income year) to continue to access the instant asset write-off (under section 40-82 of the ITAA 1997) until 31 December 2020.

[Schedule 4, items 2, 3, 8, 21, 22 and 23, paragraphs 40-82(1)(b), 40-82(1)(d), 40-82(1)(e), subsections 40-82(2A) and 40-82(2B) and paragraph 40-82(4A)(a) of the ITAA 1997, and subsections 328-180(4) and 328-180(4A) of the ITTPA 1997]

Current year rules - immediate deduction for assets first used or installed ready for use in the income year

4.19 Under the amendments, the instant asset write-off threshold of $150,000 continues to apply to the decline in value of the eligible depreciating asset as at:

•

the end of the income year, if the asset is first used or installed ready for use for a taxable purpose in an income year that ends on or before 31 December 2020; or

•

31 December 2020, if the asset is first used or installed ready for use for a taxable purpose on or before 31 December 2020, but the income year ends after 31 December 2020.

4.20 The decline in value is either:

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the cost of the asset at the end of the income year of the entity where the year ends before 31 December 2020 or otherwise the cost on 31 December 2020, if the asset's start time coincides with the income year in which it is first used or installed ready for use for a taxable purpose; or

•

the sum of the opening adjustable value for the current year and any amount included in the second element of the asset's cost for the income year other than an amount included after 31 December 2020, if the asset's start time occurred in an earlier income year than the income year it is first used or installed ready for use for a taxable purpose.

[Schedule 4, items 3, 6, 23 and 25, subsections 40-82(2A) and 40-82(3A) of the ITAA 1997 and subsections 328-180(4A) and 328-180(5A) of the ITTPA 1997]

4.21 An asset's start time is when the asset is first used or installed ready for use for any purpose, whether that is a taxable purpose or not (see section 40-60 of the ITAA 1997).

Later year rules

Larger business entities

4.22 Where a larger business (aggregated turnover of $10 million or more but less than $500 million for the income year) has claimed an immediate deduction for an asset in an income year, and if in a later year it includes a second element cost for the asset, it can also claim an immediate deduction for the first amount of the second element cost. However, the deduction is only available if this amount is less than $150,000. This later year must be an income year that ends on or after 2 April 2019 and this amount must be included on or before 31 December 2020. [Schedule 4, items 6, 7, 9 and 10, subsections 40-82(3A), 40-82(4A), and 40-82(4B) of the ITAA 1997]

4.23 The second element cost is worked out after the taxpayer starts to hold the asset and is generally the amount paid to bring the depreciating asset to its present condition and location (see section 40-190 of the ITAA 1997). The second element cost generally includes improvements and upgrades to an existing asset.

Example 4.1: The extended instant asset write-off in a later year - amounts included on or before 31 December 2020

PLT & Co has an aggregated turnover of $35 million for the income year ended 30 June 2020.

On 3 October 2020, PLT & Co made improvements to capital equipment it uses. This improvement cost $20,000. The initial cost of that capital equipment was immediately deducted in the income year ended 30 June 2020 under the instant asset write-off rules.

PLT & Co includes $20,000 as the first amount added to the second element of cost for that equipment on 3 October 2020. As this occurred before 1 January 2021, PLT & Co is eligible to claim the instant asset write-off for this second element of cost for the equipment.

For the income year ended 30 June 2021, PLT & Co claims the instant asset write-off for the $20,000 of improvements to the capital equipment.

4.24 Once these amendments cease to apply on 1 January 2021, the instant asset write-off for larger business entities (aggregated turnover of $10 million or more and under $500 million for the income year) will no longer be available. Taxpayers must then use the general uniform capital allowance rules in Division 40 of the ITAA 1997 to calculate the decline in value of depreciating assets. [Schedule 4, item 11, subsections 40-82(5) and 40-82(6) of the ITAA 1997]

Small business entities

4.25 Where a small business entity has claimed an immediate deduction for an asset in an income year and it has included an amount of a second element of cost for the asset in a later year, it can claim the amount of the second element of cost of the eligible depreciating asset in that later year. However, a deduction is only available if:

•

the asset was first acquired on or after 12 May 2015;

•

the amount has been included in the second element of cost on or before 31 December 2020; and

•

this amount is less than $150,000.

[Schedule 4, item 24, subparagraph 328-180(5(d)(ii) of the ITTPA 1997]

4.26 For small business entities using the simplified depreciation rules, once the increased instant asset write-off rules cease to apply on and after 1 January 2021, the instant asset write-off threshold reverts to $1,000. As the increased instant asset write-off ends part way through most income years, there is a transitional rule to deal with second element of cost amounts included after 31 December 2020 but in the same income year as when the eligible asset was first used or installed ready for use. The transitional rule provides that a small business entity can deduct the second element of cost for an asset totalling less than $1,000 if:

•

the entity first uses or installs the asset on or after 12 March 2020 and prior to 1 January 2021 and is entitled to deduct the full amount for the asset under the instant asset rules; and

•

the second element of cost for the asset would be deductible in the same income year as the instant asset amount can be deducted.

[Schedule 4, item 25, subsection 328-180(5A) of the ITTPA 1997]

4.27 This transitional rule ensures that a post 31 December 2020 second element of cost amount of less than $1,000 is not prevented from being immediately deducted where it would have qualified for a deduction if it had been included in a later income year. No similar rule is required for Division 40 as no threshold applies under that Division for such expenditure included in the cost of an asset after 31 December 2020.

4.28 Once these amendments cease to apply on 1 January 2021, the instant asset write-off threshold for small business entities (aggregated turnover less than $10 million for the income year) using the simplified rules will revert to $1,000.

Modifying access to the instant asset write-off for businesses with a substituted accounting period

4.29 Generally, income years end on 30 June. However, the Commissioner may grant leave for an entity to adopt a substituted accounting period ending on a date other than 30 June (see section 18 of the Income Tax Assessment Act 1936).

4.30 To be eligible to apply the instant asset write-off under section 40-82 of the ITAA 1997, the decline in value of an asset held by a taxpayer for an income year (the current year) must be in the income year the taxpayer starts to use the asset or has it installed ready for use for a taxable purpose.

4.31 Prior to these amendments, an eligible income year (the current year) had to end on or after 2 April 2019 and on or before 30 June 2020.

4.32 For taxpayers without a substituted accounting period (i.e. their income year ends on 30 June), the requirement that the current year must end on or before 30 June 2020 applies appropriately because the income year in which the instant asset write-off can be claimed aligns with the end of the income year for that taxpayer (see paragraph 40-82(1)(b) of the ITAA 1997).

4.33 However, where a taxpayer adopts a substituted accounting period with an income year that ends on a day other than 30 June, the taxpayer may have a shorter period of time to access the instant asset write-off under section 40-82 of the ITAA 1997. For example, prior to these amendments, a taxpayer with a substituted accounting period ending on 31 August would only be able to access the instant asset write-off under section 40-82 of the ITAA 1997 for eligible expenditure between 2 April 2019 and 31 August 2019.

4.34 The amendments adjust the criteria for access to the instant asset write-off to ensure that taxpayers on a substituted accounting period can still effectively access the instant asset write-off. Accordingly, along with the amendment to extend the instant asset write-off to 31 December 2020, a larger business that has adopted a substituted accounting period can access the $150,000 instant asset write-off for assets first acquired in the period beginning on 2 April 2019 and ending on 31 December 2020. The decline in value can be claimed in the income year in which the business starts to use the asset or has it installed ready for use for a taxable purpose. This is the case regardless of whether the business' income year ends on 30 June, or another time under a substituted accounting period. [Schedule 4, items 4 and 6, subsections 40-82(2A), 40-82(2B) and 40-82(3A) of the ITAA 1997]

4.35 Similarly, the amendments adjust the criteria for access to the $30,000 instant asset write-off in the relevant period to ensure that eligible taxpayers on a substituted accounting period can access the instant asset write-off regardless of when their income year ends. Generally, to access the $30,000 instant asset write-off:

•

the taxpayer must have an aggregated turnover of $10 million or more but less than $50 million in the relevant income year; and

•

the asset must be first acquired in the period beginning on 2 April 2019 and ending before 12 March 2020 and the taxpayer must start to use the asset, or have it installed ready for use, for a taxable purpose on or after 2 April 2019 but before 12 March 2020.

4.36 The decline in value can be claimed in the income year in which the business starts to use the asset or has it installed ready for use for a taxable purpose. This is the case regardless of whether the business' income year ends on 30 June, or another time under a substituted accounting period. [Schedule 4, items 2 and 5, subsections 40-82(1) and 40-82(3) of the ITAA 1997]

Consequential amendments

Small business entities

4.37 A small business entity can choose to deduct amounts for most of its depreciating assets under a special depreciation regime - the simplified depreciation rules (see Subdivision 328-D of the ITAA 1997). A small business entity that chooses to use the simplified depreciation rules works out the decline in value under those rules instead of Division 40 of the ITAA 1997 (regarding capital allowances). Under the simplified depreciation rules, a small business entity has access to an immediate write-off for depreciating assets that are under a threshold amount and a simple pooling facility for other depreciating assets.

4.38 Schedule 4 to the Bill makes amendments to the ITTPA 1997 so that the increased threshold of $150,000 for the instant asset write-off continues to apply until 31 December 2020. [Schedule 4, items 23, 24, 25 and 26, subsections 328-180(4A) and 328-180(5A) and subparagraphs 328-180(5)(d)(ii) and 328-180(6)(d)(ii) of the ITTPA 1997]

4.39 Generally, if a small business entity chooses to use the simplified depreciation rules to deduct amounts for depreciating assets for an income year but does not choose to use the rules for a later income year for which it is eligible to make this choice, the entity is subject to the 'lock-out rule'. This rule prevents the entity from choosing to use the simplified depreciation rules until at least five years after the first later income year for which it satisfied the conditions to make the choice to use the simplified depreciation rules but did not do so (see subsection 328-175(10) of the ITAA 1997).

4.40 Prior to these amendments, the loc k-out rule was temporarily suspended for an income year that ends either on or after 12 May 2015 and on or before 30 June 2020. Accordingly, during one of those income years (described as an 'increased access year' in section 328-180 of the ITTPA 1997), a small business entity that had previously elected to not use the simplified depreciation rules can choose to use it again for an income year without having to wait for at least five years (see subsection 328-180(2) of the ITTPA 1997 and subsection 328-175(10) of the ITAA 1997).

4.41 Schedule 4 amends the ITTPA 1997 so that the temporary suspension of the loc k-out rule is extended to the end of an income year that includes 31 December 2020. For small businesses that have not adopted a substituted accounting period, the effect of the amendments is that the temporary suspension of the lock-out rule is extended to 30 June 2021. This ensures that small businesses that are otherwise eligible to claim the extended instant asset write-off are not locked out of using the simplified depreciation rules. [Schedule 4, item 19, definition of increased access year in subsection 328-180(1) of the ITTPA 1997]

Other consequential amendments

4.42 Schedule 4 makes a number of minor consequential amendments to refer to 31 December 2020 as the extended date for the instant asset write-off rather than 30 June 2020. These amendments are made to headings, cross-references and notes in relevant provisions in the ITAA 1997 and the ITTPA 1997. [Schedule 4, items 1, 12, 13, 14, 15, 16, 17, 18 and 20, sections 40-82, 328-180, 328-210, 328-250 and 328-253 of the ITAA 1997 and section 328-180 of the ITTPA 1997]

Application and transitional provisions

4.43 The amendments commence on the day after Royal Assent of the Bill. [Clause 2]

4.44 The effect of the amendments is to extend the instant asset write-off from 1 July 2020 for a further 6 months. The removal of the requirement that the current year ends on or before 30 June 2020 applies so that, from 2 April 2019, qualifying larger entities with substituted accounting periods can also obtain the benefit of the instant asset writ e-off until 31 December 2020 regardless of what substituted accounting period they have adopted.

4.45 To the extent that the amendments apply retrospectively for taxpayers with substituted accounting periods, the retrospectivity ensures that these taxpayers are able to obtain the benefit of the instant asset writ e-off for the full periods intended. The changes are wholly beneficial to taxpayers affected by this change as they are able to fully deduct amounts in an income year rather than writing them off over a longer period.