Edited version of private advice

Authorisation Number: 1052131317089

Date of advice: 26 June 2023

Ruling

Subject: Temporary full expensing

Question

Is your business entitled to claim the costs of a solar panel system installed on your business property under the temporary full expensing (TFE) measures of the Income Tax (transitional provisions) Act 1997 (IT(TP)A) for 2022 income year?

Answer

Your business can claim the business portion of the costs incurred in relation to the installation of solar panels following the TFE rules.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commences on:

1 July 2021

Relevant facts and circumstances

You own two businesses located in the property which is also your main residence.

Your main business activity is distribution of leather goods.

You have two offices and two storage areas located in your main residence.

In the year ended 30 June 2022 you have upgraded the solar system on your property to a new solar inverter, solar panels and lithium batteries.

You would like to recognise these costs as incurred by a business and claim these costs as a valid business "energy" expense.

The turnover of your business for the year ended 30 June 2022 is less than $5 billion.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Division 45

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-120

Income Tax Assessment Act 1997 subsection 40-45(2)

Income Tax Assessment Act 1997 paragraph 43-70(2)(e)

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

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

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

Reasons for decision

Summary

The requirements for temporary full expensing are satisfied and none of the exceptions apply. Therefore, your business is eligible for temporary full expensing and can deduct the business portion of the costs incurred in relation to the asset following the TFE rules.

Detailed reasoning

All legislative provisions refer to Income tax Assessment Act 1997 (ITAA1997) unless otherwise stated.

Temporary Full Expensing (TFE) means the immediate deduction of the cost of depreciating assets in accordance with the provisions in Subdivision 40-BB of the Income Tax (transitional provisions) Act 1997 (IT(TP)A).

Eligible entity

Section 40-155 of the IT(TP)A 1997 requires an entity accessing TFE to be a 'small business entity'. This includes an entity that would satisfy the definition of a small business entity in Subdivision 328-C for an income year if each reference in Subdivision 328-C to an aggregated turnover of $10 million were instead a reference to $5 billion. Section 328-115 and section 328-120 provide that aggregated turnover generally includes the total ordinary income that an entity derives in the income year in the ordinary course of carrying on a business.

For the income tax year ended 30 June 2022, your company's total income was less than $50 million so its aggerated turnover is also less than $50 million. As a result, your company satisfies this condition.

Eligible assets

Under subsection 40-150 of the IT(TP)A 1997, a depreciating asset held by an entity is eligible for TFE if:

(a)          the entity starts to hold the asset on or before 30 June 2023; and

(b)          the entity starts to use the asset, or have it installed ready for use, for a taxable purpose on or before 30 June 2023

Because the asset has been installed in February 2022 and your business started to use it immediately after the installation, this condition is satisfied.

Section 40-150 of the IT(TP)A 1997 further outlines exceptions which prevent an asset from being eligible for TFE. These exceptions are as follows:

Exception 1: Assets to which Division 40 of the ITAA1997 does not apply

Section 40-45 outlines assets that are excluded from Division 40. Specifically, subsection 40-45(2) states:

(2) This division does not apply to capital works for which you can deduct amounts under Division 43, or for which you could deduct amounts under that Division:

(a) but for expenditure being incurred, or capital works being started, before a particular day; or

(b) had you used the capital works for a purpose relevant to those capital works under section 43-140.

Determining whether the asset falls within subsection 40-45(2) requires a consideration of whether it is capital works for which amounts could be deducted under Division 43.

According to the Australian Taxation Office's Interpretative Decision ATO ID 2002/752, the asset is classified as plant within the meaning of that term in section 45-40 and therefore, excluded from a construction expenditure by paragraph 43-70(2)(e). As a result, the asset is subject to Division 40 and is a depreciating asset. Moreover, according to Taxation Ruling TR 2021/3 Income Tax: effective life of depreciating assets (applicable from 1 July 2021), the effective life of the asset is XX years. As a result, this exception does not apply.

Exception 2: Assets not used or located in Australia

Because the asset is used and located in Australia this exception does not apply.

Exception 3: Assets for which the decline in value is worked out under Subdivision 40-E or 40-F of the ITAA1997

The above-mentioned subdivisions are not relevant to your case, so this exception does not apply.

Accordingly, the requirements for temporary full expensing under Subdivision 40-BB of the IT(TP)A 1997 are satisfied and your business can deduct the business portion of the cost for the asset that it first held and first used in the 2022 income year.