During the release of the 2020-21 Budget, the Australian Government announced a major overhaul to depreciation tax concessions.
Eligible businesses that have acquired an asset from 6th October 2020 are now able to deduct the cost of the eligible depreciating asset with no cost limit (Previously asset cost needed to be less than $150,000). The purchased asset needed to be in use or ready for use by 30 June 2022 in order to claim the deduction.
So, is your business eligible?
In order to be qualify, your business must have a turnover of less than $5 billion for the previous income year or an aggregated turnover of less than $5 billion during the current year based on an assessment made at the commencement of the current year.
Corporate entities that qualify under this alternative test must have invested in depreciating assets costing greater than $100 million during the 2017, 2018 and 2019 income years.
As mentioned earlier, eligible depreciating assets must be acquired from 7:30pm AEDT on 6 October 2020 and be either installed ready for use or actually used before 30 June 2022. The asset cannot be subsequently disposed of during the income year. In addition, the asset must be a depreciating asset that is subject to Division 40 of the Income Tax Assessment Act 1997 (“ITAA97”) and must not be:
- Capital works subject to Division 43 ITAA97;
- Low-value pool assets;
- Assets that have been allocated to a software development pool;
- Specific types of primary production depreciating assets; and
- Overseas assets.
There are also specific asset exclusions if a business has aggregated turnover of $50m or more, or only satisfies the corporate entity requirements:
Businesses with $50m or more turnover
- The purchase of second-hand assets is not eligible; and
- Assets that were acquired under a commitment that was entered into prior to 6 October 2020 i.e. if an eligible business or corporate entity was already committed to the asset acquisition before the rules were announced, the asset is not eligible.
Corporate tax entities only (who satisfy the $100m asset investment criteria above)
- Intangible assets;
- Assets that were previously held by the corporate entities associate; and
- Assets that the corporate entities associate or foreign residents are able to use.
There are certain scenarios where a business would prefer to deduct and assets cost over time and under the ordinary depreciation rules such as:
- Tax free threshold utilisation
- Loss making businesses
- Businesses joining a tax consolidated group
Small businesses opt-out issues
Whilst all businesses are able to opt-out of the full expensing rules for assets purchased on an asset by asset basis, small business entities (less than $10m turnover) who have elected to utilise small business pooling are currently required to write-off the full balance of their general small business pool at the end of the 30 June 2021 income year, and have no choice to opt-out of this write-off.
Should you have any questions we recommend you contact your Armada Advisor to discuss how the above could affect your business.