Edited version of private advice

Authorisation Number: 1051931220220

Date of advice: 17 January 2022

Ruling

Subject: Depreciation deductions - temporary full expensing

Question

Am I eligible to deduct the business portion of the cost of the relevant asset through temporary full expensing under Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997)?

Answer

Yes. The eligibility criteria for temporary full expensing are satisfied, therefore you are able to deduct the business portion of the cost of the relevant asset that is first held and first used for a taxable purpose in the income year ending 30 June 20XX.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an entity with an aggregated turnover of less than $X.

You have acquired the relevant asset to be used in business. The business activity will be marketed to a particular type of customer.

You have a business plan and projected revenues and expenses, and an intention to make a profit. You are making modifications to the relevant asset to make it more fit-for-purpose for your activity. There will be ancillary activities which comprise the overall business. Insurance has been acquired to cover both the primary and ancillary activities.

You acquired the asset in the 20XX financial year. Your business activity will commence in the 20XX financial year.

You will use the relevant asset principally in Australia for the principal purpose of carrying on a business and generating taxable income. There will be no private use of the relevant asset.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 26-47

Income Tax Assessment Act 1997 subsection 26-47(2)

Income Tax Assessment Act 1997 subsection 26-47(3)

Income Tax Assessment Act 1997 paragraph 26-47(3)(b)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 paragraph 328-110(1)(a)

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

Income Tax (Transitional Provisions) Act 1997 section 40-140

Income Tax (Transitional Provisions) Act 1997 section 40-150

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(1)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(2)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(3)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(4)

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

Income Tax (Transitional Provisions) Act 1997 section 40-160

Income Tax (Transitional Provisions) Act 1997 subsection 40-160(1)

Income Tax (Transitional Provisions) Act 1997 subsection 40-160(3)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(3)(a)

Income Tax (Transitional Provisions) Act 1997 section 40-190

Reasons for decision

The provisions relating to temporary full expensing are contained within Subdivision 40-BB of the ITTPA 1997.

The application of the temporary full expensing provisions in Subdivision 40-BB of the ITTPA 1997 require a taxpayer to satisfy the definition of a "small business entity" in s328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) as modified by the relevant provisions in the ITTPA 1997. Section 40-155 of the ITTPA 1997 modifies the small business aggregated turnover threshold in Subdivision 328-C of the ITAA 1997 such that, for the purposes of temporary full expensing, the aggregated turnover threshold for eligibility becomes $5 billion.

Paragraph 328-110(1)(a) of the ITAA 1997 provides that you are a small business entity if you carry on a business in the current year. Whether the activities of an entity constitute the carrying on of a business is a question of fact and must be answered with having regard to the indicia of carrying on a business as a whole. Some general indicia of carrying on a business are discussed in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? and Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business?

The following indicia discussed in TR 97/11, based on fact and degree, will be relevant to the consideration of whether a business is being carried on:

•         significant commercial purpose or character;

•         intention to make a profit;

•         prospect of profit;

•         repetition and regularity of the activity;

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

•         the size, scale and permanency of the activity;

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

•         the existence of a business plan;

•         the taxpayer's knowledge or skill in relation to the activity.

Based on the relevant facts and circumstances of this Ruling, it is considered that your activities would constitute that of a business, and your activity will commence in the income year ending 30 June 20XX. In other words, you are considered to be a business in relation to section 328-110 of the ITAA 1997 and Subdivision 40-BB of the ITTPA 1997.

The full expensing for the cost of the relevant asset is worked out under section 40-160 of the ITTPA 1997. Subsection 40-160(1) of the ITTPA 1997 provides that for the purposes of Division 40 of the ITAA 1997, the decline in value of a depreciating asset you hold for an income year (the current year) is the amount worked out under subsection 40-160(3) of the ITTPA 1997 if:

(a)  you start to hold the asset at or after the 2020 budget time; and

(b)  you start to use the asset, or have it installed ready for use, for a taxable purpose in the current year; and

(c)   you are covered by section 40-150 for the asset; and

(d)  you are covered for the current year by any of the following two subparagraphs:

(i)    section 40-155 (about businesses with turnover under $5 billion);

(ii)   section 40-157 (about corporate tax entities with income under $5 billion); and

(e)  no balancing adjustment event happens to the asset in the current year; and

(f)    you have not made a choice under section 40-190 in relation to the current year.

Section 40-140 of the ITTPA 1997 provides that 2020 budget time means 7.30 pm, by legal time in the Australian Capital Territory, on 6 October 2020. In your circumstances, you acquired the relevant asset after this date, and before 30 June 20XX. It is assumed that no balancing adjustment event will happen to the asset in the current year; it is also assumed that you have not made a choice under section 40-190 of the ITTPA 1997 in relation to the current year.

Paragraph 40-160(3)(a) of the ITTPA 1997 provides that if the asset's start time occurs in the current year, the decline in value for the current year is the asset's cost as at the end of the current year, disregarding any amount included in the asset's cost after 30 June 2022.

The integrity provisions contained within subsection 26-47(2) of the ITAA 1997 will not apply if the relevant asset is used solely in business, by virtue of paragraph 26-47(3)(b) of the ITAA 1997, however these rules may apply if there is any private use of the relevant asset.

Therefore, your asset qualifies for temporary full expensing. Under temporary full expensing, no threshold applies to the cost of the asset. Therefore, you are eligible to deduct the business portion of the depreciating asset purchased and installed for use after the 2020 budget time for the income year ending 30 June 20XX.