As the end of financial year approaches, the temporary full expensing rules will be coming to an end. What must businesses do to avoid missing out on accelerated tax deductions for this year?
The temporary full expensing (“TFE“) rules provide for a full deduction to businesses for the cost of eligible depreciating assets in the year they are first used, or installed ready for use, for a taxable purpose prior to 30 June 2023. Taxpayers should bear this strict timeline in mind to avoid missing out on accelerated tax deductions. Merely contracting for the purchase of an asset, or even becoming the owner of the asset by 30 June 2023 is not sufficient.
From 1 July 2023, the accelerated deductions will conclude, and depreciating assets will be required to be written-off for tax purposes over their effective lives.
First used or installed ready for use by 30 June 2023
Taxpayers should ensure that any capital investments are made with sufficient time to allow for delivery and use or installation of the relevant assets by 30 June 2023 to qualify for TFE. The 30 June 2023 date is a hard deadline regardless of whether the business entity has a 30 June year-end or a substituted accounting period. There is no discretion in the law to extend the date by which assets must meet this first taxable use requirement. As such, unexpected delays in the delivery, construction or installation of assets could result in taxpayers missing out.
Additionally, first use of an asset for a non-taxable purpose (e.g. private use of a car) by 30 June 2023 is not sufficient. Where assets are to be used for a combination of taxable and non-taxable purposes, taxpayers should ensure first taxable use of the asset occurs by 30 June 2023.
Taxpayers should consider other eligibility criteria including ensuring that:
- They carry on a business as part of a global group with less than $5 billion aggregated turnover
- The asset is principally used in a business in Australia
- For business entities with aggregated turnover of $50 million or more – the asset is not a second-hand asset
- The asset is not an excluded asset (e.g. capital works, certain primary production assets and assets added to a low-value or software development pool)
Second element costs
“Second element costs” being those that contribute to bringing the asset to its present condition or location from time to time (e.g. improvement costs) may also qualify for TFE in the 2023 income year if they are paid or incurred prior to 30 June 2023. However, simply prepaying amounts or incurring amounts for improvements to existing assets that are to be made after 30 June 2023 are not likely to result in those costs qualifying for TFE. Taxpayers should also keep the 30 June 2023 deadline in mind if they are considering making improvements to or relocating existing depreciating assets to ensure that these things can be done in time.
Rules from 1 July 2023
From 1 July 2023, depreciating assets are required to be written-off for tax purposes over their effective lives.
- For small business entities using simplified depreciation, the cost threshold of an asset for instant write-off reverts to $1,000 for the first time since 12 May 2015 when it was increased to $20,000 and continuously extended and increased since then. Additionally, small business taxpayers who maintained general small business pools should begin these again after pooling was effectively made redundant under TFE which provided for a full write-off of pool balances as at 30 June 2021. Small business entities who had not previously elected into the general small business pool (whether by choice or because they only qualify as small business entities this year) may consider doing so for the 2023 year. This could allow them to bring the tax written down values of eligible depreciating assets into the pool in 2023 with a full write-off of the balance being available.
- For other taxpayers, no instant asset write-off applies from 1 July 2023, although assets costing less than $1,000 are able to be allocated to a low value pool if the taxpayer elects. Business taxpayers may treat expenditures of up to $100 as revenue in nature under PS LA 2003/8 and deduct these in full and non-business taxpayers (e.g. employees) may rely on a statutory rule allowing a full deduction for the cost of depreciating assets costing $300 or less.
It is critical that if you wish to claim temporary full expensing for capital purchases for the 2022-23 income year that you ensure you meet the necessary conditions by 30 June 2023 and plan accordingly to ensure that the delivery and installation of assets can occur prior to the deadline. If you have any questions please reach out to one of your local Pitcher Partners tax experts.