In an effort to address the economic consequences brought about by the coronavirus pandemic, the Australian Government introduced various economic stimulus measures. The goal was to help eligible businesses recover from the impacts of being in lockdown.
Beyond the cash incentives, the Australian Tax Office (ATO) introduced various tax incentives for businesses, including the Instant Asset Write-off Scheme, the Backing Business Investment (BBI) and the Temporary Full Expensing.
We have previously explained the benefits of maximising your small business’s tax deductions through simplified small business depreciation rules such as the BBI and Instant Asset Write-off.
The temporary full expensing rules allow businesses to deduct the full cost of eligible depreciable assets in the year they are first held, used, or installed for a taxable purpose. Small business entities and corporate tax entities can benefit significantly from these provisions, provided they meet the eligibility criteria.
So, this article will cover the final piece of the puzzle – Temporary Full Expensing.
***Important:***As of July 1, 2023, the temporary full expensing measure has officially concluded. This policy has been replaced with the instant asset write-off, which has a threshold of $20,000. This marks a significant change for businesses in their tax planning and asset investment strategies. The provisions affected the 2021, 2022, and 2023 income years, highlighting the implications for tax credits and deductions available during those periods.
Read on to find out how all of this still applies to your circumstances.
What is Temporary Full Expensing of Depreciating Assets?
The Australian Government first announced the Instant Asset Write-Off Scheme in 2015 to allow small businesses to maximise their deductions by claiming depreciation for certain eligible assets as an immediate deduction instead of over a few years. However, business owners could only write off assets immediately if the total cost was less than the prescribed threshold amount.
However, in response to the effects of the global coronavirus pandemic, the ATO made the following changes to the instant asset write-off. From 12 March 2020 until 31 December 2020:
- The threshold amount for each depreciating asset had increased from $30,000 to $150,000
- The eligibility criteria had been expanded to cover businesses with an annual aggregated turnover of less than $500 million. This was increased from $50 million.
This means that business owners who first used or installed assets costing less than $150,000 between 12 March 2020 and 30 June 2021 could write off the entire value of the asset immediately.
While the world hoped that the pandemic would end sooner rather than later, the latter proved to be true, and the economic crisis continued to loom.
So, in the 2020 Federal Budget speech, the government unveiled a new version of the scheme, coined Temporary Full Expensing, which allowed small business owners to deduct the full amount of any eligible depreciating asset first used or installed after 6 October 2020.
In other words, the threshold limit was lifted, and the scheme extended to businesses with an aggregated turnover of less than $5 billion. This included capital assets, with no limit on the number a business could acquire, provided they met the eligibility criteria.
As part of the 2021-22 Federal Budget, the Temporary Full Expensing Scheme was extended for another year, which meant that it extended to assets first used or installed for taxable purposes between 6 October and 30 June 2023.
Note: So, it was crucial for businesses to ensure that relevant assets were delivered and installed in time to qualify for temporary full expensing before the strict deadline of 30 June 2023.
Likewise, business owners could deduct the full cost of improvements to these assets or their existing eligible depreciating assets made during this period, emphasising the need to meet the installation deadlines to benefit from accelerated tax deductions.
And unlike with the instant asset write-off incentive, a business owner could choose to ‘opt-out’ of Temporary Full Expensing for an income year on an asset-by-asset basis and claim a deduction using other depreciation rules.
What are the Criteria for Eligible Businesses?
Any small or medium-large business entity with an aggregated turnover of less than $5 billion were eligible to use temporary full expensing (TFE). However, an alternative income test applied for corporate tax entities with an aggregated turnover of more than $5 billion.
To qualify for the temporary full expensing incentive, the depreciating asset would have had to have been:
- New or second-hand*
- First held by you at or after 7.30 pm AEDT on 6 October 2020
- First used or installed ready for use by you for a taxable purpose (such as a business purpose) between 7.30 pm AEDT on 6 October 2020 and 30 June 2022
*If it is a second-hand asset, your business can only utilise the incentive if its aggregated turnover is less than $50 million
If you didn’t meet the criteria for the temporary full expensing incentive (because you acquired the asset before 6 October 2020), you may qualify for the instant asset write-off scheme.
However, to qualify for the instant asset write-off, your business must have opted to use the simplified depreciation rules.
How Does The Temporary Full Expensing Scheme Interact with the Instant Asset Write-Off Scheme?
The temporary full expensing scheme was essentially a boosted version of the instant asset write-off scheme that applies to more businesses and a broader range of assets. This scheme allows businesses to benefit from an immediate tax deduction, significantly reducing their taxable income and improving cash flow by allowing full write-offs for eligible assets in the year they are first used, rather than spreading the deduction over multiple years.
Additionally, businesses should consider the relevance of general small business pools, especially with the changes to tax treatment and depreciation rules that took effect from 1 July 2023. Small business entities can resume using these pools to facilitate a full write-off of eligible depreciating assets, which can be highly beneficial.
Under this scheme, businesses can immediately claim deductions for the cost of improvements to their existing assets, such as machinery and equipment, which continue to generate deductions. For example, a restaurant can claim the full cost of qualifying assets as immediate tax deductions, provided they meet the eligibility criteria based on the business’s aggregated turnover.
Here is a summary of when each scheme applied/ applies:
| Business Type | Aggregated Turnover | Temporary Full Expensing (6 Oct 2020 – 30 Jun 2023) | Instant Asset Write-Off (1 Jul 2023 – 30 Jun 2024) |
| Small business using the simplified depreciation rules | Less than $10 million | Full write-off for assets (no cost restriction) first held from 6 October 2020 to 30 June 2023 | Full write-off for assets that cost less than $20,000 and first used or installed ready for use from 1 July 2023 to 30 June 2024 |
| Small business not using the simplified depreciation rules | Less than $10 million | Full write-off for assets (no cost restriction) first held from 6 October 2020 to 30 June 2023 | Not eligible |
| Medium business | Between $10 million and less than $50 million | Full write-off for assets (no cost restriction) first held from 6 October 2020 to 30 June 2023 | Not eligible |
| Medium to large business | Between $50 million and less than $500 million | Full write-off for assets (no cost restriction) first held from 6 October 2020 to 30 June 2023 | Not eligible |
| Large business | Between $500 million and less than $5 billion (Businesses with an aggregated turnover more than $5 billion don’t qualify for these incentives) | Full write-off for assets (no cost restriction) first held from 6 October 2020 to 30 June 2023 |
What Happened After June 30, 2023?
- The temporary full expensing scheme, which allowed eligible businesses to immediately deduct the entire cost of qualifying assets, ended on 30 June 2023. There are no further extensions of this scheme. Accelerated tax deductions were a key feature of this scheme, emphasising the importance of acting before the financial year ends to maximise tax benefits.
- From 1 July 2023, depreciating assets will be required to be written off for tax purposes over their effective lives, as per the standard depreciation rules.
- Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified pool and depreciated at 15% in the first income year and 30% each income year thereafter. However, certain intangible assets, including software allocated to a software development pool, are not eligible for these tax benefits. Businesses can still benefit from an immediate tax deduction for other qualifying assets, enhancing cash flow and enabling quicker investments.
- The provisions that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out will continue to be suspended until 30 June 2024.
Businesses not using the simplified depreciation rules or with an aggregated turnover of $10 million or more are not eligible for the instant asset write-off from 1 July 2023.
How Can Duo Tax Help?
Duo Tax is a team of quantity surveyors and registered tax agents who are experts at providing accurate depreciation reports for your building and equipment that will help reduce your annual taxes by maximising depreciation deductions.
Most first-time business owners aren’t aware that property depreciation is one of the largest tax deductions they can claim on their business assets. Such assets include new or used cars, computers, tools/equipment, and improvements to existing assets.
We also assist in claiming deductions for the business portion of the cost of qualifying assets, such as new or used cars, computers, tools/equipment, and improvements to existing assets. Businesses can also consider utilizing the general small business pool for the 2023 tax year, which provides an opportunity for full write-off of pool balances below $20,000.
Our quantity surveyors are experts at simplifying the process of claiming depreciation and ensuring you’re taking full advantage by maximising deductions on assets purchased and their eligibility under schemes like the Temporary Full Expensing.
Additionally, it’s important to note the car limit for vehicles, as those exceeding this threshold cannot be depreciated, impacting tax deductions. We are committed to delivering exceptional results every time, with competitive pricing at the forefront of our values.
Key Takeaways
There are several depreciation methods available, and each has its own advantages and disadvantages. Understanding tax laws is crucial in determining the best method for your circumstances. Speak to your tax professional today.
For Australian businesses, the Temporary Full Expensing (TFE) scheme offers significant benefits by allowing immediate tax deductions on eligible assets, promoting growth and competitiveness.
Certain assets, such as primary production assets, may be excluded from the depreciating asset measures, with specific cost limits and eligibility criteria for claiming the cost of eligible assets for business purposes. Reducing taxable income through immediate deductions for eligible assets can decrease your business’s tax liability and enhance cash flow.
To claim temporary benefits under the TFE rules, businesses must adhere to strict deadlines for asset usage or installation and maintain accurate records to ensure successful claims.
With the help of a depreciation expert on hand, you can get all of these questions answered so that you’re maximising your depreciation deductions.To find out how much your business can save with the latest ATO tax incentives, get in touch with us today.
